Federal Capital Gains: The Primary Residence Exclusion
The biggest federal tax break for home sales is the IRC Section 121 primary residence exclusion. If you've owned and used the home as your primary residence for 2 of the last 5 years, you can exclude:
$250,000 of gain for single filers.
$500,000 of gain for married couples filing jointly.
Gain above the exclusion is taxed as long-term capital gain — typically 15% or 20% federal depending on your income bracket, with 0% if you're in the lower brackets.
The exclusion applies regardless of sale type — cash buyer, traditional listing, iBuyer, or auction. The selling method doesn't change the tax treatment.
How 'Gain' Is Calculated
Gain = Sale Price − Cost Basis − Selling Expenses.
Cost basis = original purchase price + qualifying improvements + closing costs at purchase. Don't include routine maintenance; do include capital improvements (additions, renovations, major systems replacements).
Selling expenses in a cash sale are typically minimal — you didn't pay agent commissions or major closing costs. Sometimes the buyer covers everything; sometimes you cover prorated property taxes or HOA dues.
Example: bought for $200,000, added $40,000 kitchen renovation, no agent commissions on sale. Cost basis = $240,000. Sale price $310,000. Gain = $70,000. With primary residence exclusion, $0 federal tax. Without exclusion (e.g., rental property), $70,000 at long-term capital gains rate.
State Income Tax on Home Sale Gains
Most US states tax capital gains as ordinary income — your state income tax rate applies to the federal taxable gain.
States with no income tax (no state-level tax on home sale gain): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming. (Some of these still have other state-level real estate transfer taxes.)
States with high capital gains tax rates on home sales: California (top 13.3%), New York (top 10.9% with NYC additional), Hawaii (top 11%), New Jersey (top 10.75%), Oregon (top 9.9%), Minnesota (top 9.85%).
States with flat rates: Massachusetts (5%), Illinois (4.95%), North Carolina (4.5%).
Federal exclusion applies for federal tax only; many states use the federal exclusion as a starting point but with state-specific variations. Check your state's specific rules.
Real Estate Transfer Taxes (the Other State Tax)
Most states impose a transfer tax on real estate sales — typically paid by the seller, sometimes split with the buyer, sometimes paid by the buyer alone depending on state and local custom.
Highest transfer tax states: Delaware (4%), New York (1.4-2.075%), New Jersey (0.4-1.21%), Maryland (0.5%), Massachusetts (0.456%).
Lowest: Mississippi (0%), Wyoming (0%), Texas (0%), New Mexico (0%), Indiana (0%), Kansas (0%), Arizona (0%), Idaho (0%), Louisiana (0%), Missouri (0%), Montana (0%), North Dakota (0%), Utah (0%).
The transfer tax is separate from capital gains tax. It applies regardless of whether you had a gain. Cash buyer sales handle this at closing through the title company.
Inherited Property: The Stepped-Up Basis Advantage
Inherited property receives stepped-up basis to fair market value as of the date of death. This typically eliminates or minimizes capital gains on prompt sale of inherited property.
Example: parent bought home for $80,000 in 1985; passes away in 2026 with home worth $320,000. Heir's basis is $320,000 (stepped up). Selling for $325,000 produces only $5,000 of taxable gain.
Without stepped-up basis: $80,000 → $325,000 = $245,000 gain, taxable at long-term rates.
Selling soon after inheriting maximizes the stepped-up basis advantage. Delaying for years and watching the property appreciate creates new gain above the stepped basis that becomes taxable.
Foreclosure-Adjacent Tax Considerations
Pre-foreclosure cash sale: standard tax treatment. The sale price determines gain or loss; primary residence exclusion applies if eligible. The fact of impending foreclosure doesn't change the tax math.
Short sale (sale below mortgage balance): the forgiven debt may be taxable income under IRS rules, though the Mortgage Forgiveness Debt Relief Act exclusions sometimes apply. Tax advice is essential here.
Foreclosure itself (no sale, lender takes property): may produce taxable cancellation of debt income, may produce gain/loss treated as sale at fair market value. Tax treatment varies by state and loan type.
Selling before foreclosure typically produces better tax outcome than letting foreclosure complete — fewer tax surprises, cleaner accounting.
Investment Property and Rental Sales
Investment property and rental property sales don't qualify for the primary residence exclusion. The full gain is taxable.
However, investment property allows for 1031 like-kind exchange — deferring capital gains by reinvesting proceeds into another investment property within specified time limits. Cash sales can use 1031 if the buyer cooperates with the timing structure.
Depreciation recapture applies to rental property: any depreciation deductions you took on the property are 'recaptured' at sale at a maximum 25% federal rate. This is in addition to capital gains tax on the remaining gain.
Rental sale tax planning is complex. Consult a tax professional before structuring the sale.
Reporting and Timing
Cash home sales are reported on IRS Form 1099-S, filed by the title company. The seller receives a copy after closing.
Report the sale on Schedule D and Form 8949 of your 1040. Calculate gain or loss based on basis, sale price, and improvements. Apply primary residence exclusion if eligible.
Sales close in 2026; tax reporting happens in 2027 when you file your 2026 return. Quarterly estimated tax payments may be required if the gain is substantial and outside withholding coverage.
State returns follow federal but with state-specific rules. Some states have specific schedules for capital gains.
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Get Your Free Cash OfferFrequently Asked Questions
Do I owe taxes on a cash home sale if my home was my primary residence?
Maybe not, if your gain is below the $250,000 (single) or $500,000 (married) primary residence exclusion. Above the exclusion, the excess is taxed at long-term capital gains rates federally, plus state rates if applicable.
How is an inherited property taxed at sale?
Inherited property gets stepped-up basis to fair market value at date of death. Selling soon after inheriting typically produces zero or minimal capital gains. The stepped basis is the major tax advantage of inheritance vs gifting.
Does selling for cash change my tax obligation?
No. The selling method doesn't affect tax treatment. Cash sale, traditional sale, iBuyer, auction — all have identical federal and state tax rules. The variables are ownership length, residence status, and your specific gain.
Will I owe state taxes if my state has no income tax?
On capital gains, no — states without income tax don't tax home sale gains. You may still owe state-level real estate transfer taxes (Florida and Washington have transfer taxes despite no income tax).
What if my home sold for less than I paid for it?
Personal residence losses are not deductible for federal income tax purposes. Investment property losses are. If your primary residence sold at a loss, you can't claim it as a tax deduction. Cash sales follow the same rules.