The primary residence exclusion is the big one
Under IRS rules (Section 121), a single homeowner can exclude up to $250,000 of capital gain from federal tax when selling a primary residence. A married couple filing jointly can exclude up to $500,000. The requirement is that you owned the home and lived in it as your primary residence for at least 2 of the last 5 years.
Practical effect: if you bought your house for $200,000 and sell it for $400,000, your gain is $200,000. As a single filer you owe nothing. As a married couple you owe nothing. The full $200,000 is tax-free.
This exclusion is one of the largest tax breaks in the entire IRS code and most people who qualify do not realize they qualify. It applies whether you sell for cash or list traditionally. The buyer's method of payment is irrelevant.
When you actually owe capital gains tax
You owe capital gains tax on a cash home sale when one of these is true: the gain exceeds your exclusion ($250K single, $500K joint); the property was not your primary residence (investment property, second home, inherited home you did not move into); or you have not lived in the home for at least 2 of the last 5 years.
On the gain above your exclusion, the rate is either 0 percent, 15 percent, or 20 percent depending on your total taxable income. Most middle-income sellers fall in the 15 percent bracket. High earners hit 20 percent plus a 3.8 percent net investment income tax. Low earners can land at 0 percent if total income stays under the threshold.
On an investment property sale, you also owe depreciation recapture tax (25 percent on the depreciation you claimed during ownership) on top of capital gains. This is a separate calculation that catches a lot of small landlords by surprise when they sell rentals.
Inherited property gets a stepped-up basis
Inherited property gets its tax basis stepped up to fair market value at the date of death. If your parent paid $80,000 for the house in 1985 and it was worth $300,000 when they died, your basis becomes $300,000.
If you sell for $310,000 a few months later, your taxable gain is $10,000, not $230,000. This is one of the biggest tax breaks in the code for heirs. The longer you hold after inheriting, the more new gain accumulates above the stepped-up basis, but the original appreciation during the parent's lifetime is wiped clean.
State tax sits on top of federal
Federal capital gains tax is one layer. Most states have their own capital gains or income tax that applies to home sale gains. Rates range from 0 percent (no state income tax states like Texas, Florida, Tennessee, Nevada) to over 13 percent (California).
Iowa, where I am based, taxes capital gains as ordinary income at rates up to about 5.7 percent in 2026. Illinois is a flat 4.95 percent. Missouri tops out around 4.95 percent. Ohio around 3.5 percent. Always check your specific state's current rules because they change.
On a $50,000 taxable gain in a 5 percent state with federal at 15 percent, you owe roughly $10,000 total in taxes. That is the difference between a clean net and a surprise tax bill at filing time.
What to actually do before selling
Call your CPA before you sign a contract. If you do not have one, hire one for a flat fee of $300 to $500 to run the numbers on the specific sale. This is the cheapest insurance you can buy against a tax surprise.
Bring them your original purchase price, any major capital improvements you have made (new roof, new HVAC, addition), how long you have lived in the home, and your expected sale price. They can tell you in 30 minutes whether you owe anything and what your net after tax actually is.
For investment property sales, ask about 1031 exchanges. If you reinvest the proceeds into another investment property within specific time limits, you can defer the capital gains tax entirely. This only works for investment property, not primary residences, but for landlords selling rentals it is a major planning tool.