The three-question check
If you can answer the three questions below the way the right-hand column shows, you will most likely owe no federal tax on the sale. If any answer comes out differently, keep reading, because that is where the rest of this page applies.
| Question | Answer that usually means no federal tax |
|---|---|
| Did you own the house and live in it as your main home for at least 24 months of the last 5 years? | Yes |
| Is your gain under $250,000, or $500,000 if you are married and file jointly? | Yes |
| Did you exclude the gain on another home sale in the 2 years before this one? | No |
Source: IRS Publication 523 for 2025 returns. The exclusion amounts were not changed by the 2025 federal tax law. For a married couple, only one spouse has to meet the ownership test, but both have to meet the 24-month residence test for the full $500,000.
Work out your gain before anything else
Your gain is the sale price, minus your selling costs, minus your basis. Basis starts with what you paid for the house and goes up with improvements, meaning work that added value, extended the home's life, or adapted it to a new use. A new roof, a kitchen remodel, or a finished basement counts. Painting and fixing a leak do not.
Selling costs come off the top too, which matters in a cash sale. With no listing commission, your selling costs are usually just your share of closing costs, so the gain can come out a little higher than it would on a listed sale at the same price. Keep receipts for improvements. They are the easiest way to shrink a gain on paper.
| Line | Amount |
|---|---|
| Bought the house (2012) | $160,000 |
| Improvements: new roof and kitchen | + $30,000 |
| Basis | $190,000 |
| Cash sale price (2026) | $290,000 |
| Seller's closing costs | - $4,000 |
| Gain | $96,000 |
| Taxable after the $250,000 exclusion | $0 |
Illustration with round numbers, not a real deal.
If you have not lived there two years
Missing the 24-month mark does not always mean a tax bill. If the main reason for the sale was a job move, a health issue, or an unforeseeable event, the IRS allows a reduced exclusion. A job that is at least 50 miles farther from the house is one of the qualifying examples it gives.
The reduced exclusion is roughly proportional to the time you lived there. Someone single who lived in the home 12 months out of the 24 needed, and moved for a qualifying reason, could exclude up to half of $250,000, which is $125,000. Your tax preparer will confirm the exact fraction from the dates.
Inherited houses: the step-up does most of the work
When you inherit a house, your basis is generally its fair market value on the date the owner died, not what they originally paid. Decades of appreciation drop out of the calculation. What you can be taxed on is only the change in value after the date of death, minus your selling costs.
An inherited house is usually not your main home, so the $250,000 exclusion does not apply unless you move in and meet the two-year rule yourself. For most heirs who sell within a year or so, it does not need to. Get an appraisal as of the date of death early, because that number becomes your basis and a tax preparer will want it in writing.
| Line | Amount |
|---|---|
| What the parent paid (1988) | $80,000 |
| Appraised value at date of death (your basis) | $230,000 |
| Cash sale price, 8 months later | $240,000 |
| Seller's closing costs | - $3,000 |
| Taxable gain | $7,000 |
Illustration only. Without the step-up, the same sale would show a gain of about $157,000.
Rentals and flips: where real tax bills come from
A rental, a second home, or a flip does not get the home exclusion. Gain on property held longer than a year is taxed at the long-term capital gains rates of 0, 15, or 20 percent depending on your income. Property held a year or less is taxed at your ordinary income rate, which is where most flips land.
Landlords also owe tax on the depreciation they claimed over the years, at a rate of up to 25 percent. Higher earners can add the 3.8 percent net investment income tax, which applies above $200,000 of income for single filers and $250,000 for joint filers.
A 1031 exchange can defer all of it if you buy another investment property. The deadlines are strict: you have 45 days after the sale to identify the replacement and 180 days to close on it, and the money has to sit with a qualified intermediary rather than in your account. Set that up before closing, because it cannot be fixed afterward.
State tax in the markets we cover
State tax sits on top of federal, and two states in our footprint changed in a way that matters to sellers. Missouri now lets individuals subtract 100 percent of their federal capital gains from state income, starting with the 2025 tax year, so a Missouri home sale gain is not taxed by the state. Iowa moved to a single flat rate of 3.8 percent for 2026.
| State | Rate structure for 2026 | Note for home sellers |
|---|---|---|
| Missouri | 2.0% to 4.7% | Capital gains fully subtracted for individuals from 2025 on |
| Iowa | Flat 3.8% | Capital gains taxed as regular income |
| Ohio | 2.75% on income over $26,050 | Moved to this structure January 1, 2026 |
| Indiana | Flat 2.95% | Counties add their own local income tax |
| Colorado | Flat 4.40% | |
| Illinois | Flat 4.95% | |
| Kansas | 5.20% and 5.58% | Matters on the Kansas side of the Kansas City metro |
| New Mexico | 1.50% to 5.90% | |
| Wisconsin | 3.50% to 7.65% |
Rates from the Tax Foundation's 2026 state income tax table. Missouri capital gains rule from the Missouri Department of Revenue. State tax only applies to gain that is actually taxable, so a home that qualifies for the federal exclusion usually owes no state tax either.
The 1099-S form from your title company
The person who closes the sale, usually the settlement agent at the title company, files Form 1099-S with the IRS to report the sale price. There is an exception for a main home. If the price is $250,000 or less, or $500,000 or less for a married seller, and you sign a certification that the house was your main home and the whole gain qualifies for the exclusion, the form does not have to be filed.
Ask the title company for that certification at closing if it applies to you. If a 1099-S is filed anyway, you report the sale on your return even when you owe nothing, so the IRS can match it.
What to bring to your tax preparer before you sign
Bring the closing statement from when you bought the house, receipts or invoices for major improvements, the dates you lived there, and the expected sale price and closing costs from the cash offer. For an inherited house, bring the date of death and any appraisal. For a rental, bring your depreciation schedule from past returns.
That is enough for a preparer to tell you in one meeting what you would owe and what you would actually keep. Do it before you accept an offer, since the net after tax is the number you should compare between offers.