Is selling my home taxable income?

Before any large financial transaction, it’s vital to consider the tax consequences. Selling a home is no different. Before making a decision to sell your home you should consider tax implications.

There are some significant questions about taxes when selling a home:

1. Is this a primary residence or investment property / second home?

2. How long have you owned the property?

The US government considers real estate a capital investment. When capital investments are sold for a profit they can be subject to “capital gains tax” or be treated just like other income. 

If you owned the home for less than a year, it is considered a “short term” capital gain and short term capital gains are taxed like normal income, which is not beneficial for many taxpayers. If the property was owned for more than a year, it is taxed as a “long term” capital gain. Long term capital gains taxes are 15% or 20% depending on your income level as of 2025. 

But there is some good news. 

Selling your primary residence

The government defines your primary residence as the principal or main home you live in for most of the year. If you sell your primary residence, some or all of the proceeds of that sale may be able to legally avoid capital gains tax. Sellers who are single, or married but filing separately, can exclude up to $250,000 of the gain from selling a primary residence. Married couples filing jointly can exclude up to $500,000 gain, from any capital gains, if:

• You lived in the home for 2 full years in the past 5 years,

• You have not sold another primary residence in the past 2 years and excluded that gain. 

It does not matter if you used the money to buy another home, invest, or take a vacation. Federal taxes are assessed based on how long you lived in the property as a primary residence. 

So if you live in a home for 2 years, then buy another property and live in it for 2 years, while using the first home as a rental property, at the end of 4 years, you could sell either property as your primary residence because you met the residency test (lived in it for 2 of the previous 5 years). Whichever property is sold, the capital gains, up to the limit, are likely not subject to capital gains taxes, but you would not be eligible to sell another home as a “primary residence” with the tax exclusion for another 2 years. 

Selling an investment property

Typically, the sale of investment properties, and second homes, will be subject to capital gains taxes because they are not your primary residence. But you can avoid all capital gains taxes on the sale by doing a 1031 exchange. 

1031 Exchange

A 1031 exchange, named for section 1031 of IRS code, allows a property used for investment purposes to be sold and “swapped” for a different investment property, with all taxable gains deferred until the new property is sold.  

1031 tax swaps have specific rules. Proceeds from the sale must be held in escrow by a third party, then used to buy the new property. If used correctly, there is no limit on how frequently you can do 1031 exchanges.

There are also two timing issues. Once the property to be exchanged is sold, the seller must identify the next property to be purchased within 45 days. And the exchange purchase must be completed within 180 days. 

This exchange requires the help of professionals, so be sure to reach out to an experienced real estate professional and an advisor experienced in this type of transaction.

How are “capital gains” calculated?

The gains on the sale of your home is not the same as a “seller net.” The “gain” is calculated by subtracting the property's cost basis from the net proceeds of the sale. The cost basis would include the price paid for the property as well as closing costs and any improvements done to the property.

So if you bought a home for $150,000 and paid $5K in closing costs and put in $20,000 in improvements, the cost basis could be $175,000. If you sell the home for a net of $200,000, the capital gains would be $25,000, not the $50,000 difference in purchase price from sale price.

For investment properties, the cost basis would be impacted by any deductions taken for depreciation and depletion as well. A qualified tax advisor should give you guidance here. 

There are some special cases that can change these scenarios. If a property is inherited, a divorce is occurring or the recipient used “stepped up basis” on investment property, the tax implications can change significantly. Again, consult a qualified advisor before selling any property. 

North Carolina Tax implications

How does North Carolina treat proceeds from the sale of a home? Unfortunately, North Carolina taxes most home sale proceeds as income. As a result, all income from the sale of a home is taxable under the state’s flat tax rate of 4.25% (as of 2025)

In all real estate transactions, you should keep careful records of the purchase price, closing costs, home improvements, and fees to sell the property. They will be critical in determining your cost basis and any gains on the home. And you should talk to a highly qualified local realtor to be sure you understand the value and likely sale range of any property before deciding to sell or invest.

Disclaimer: This is NOT a comprehensive guide for addressing all the tax implications of selling a home. Tax laws are subject to change, and it's important to consult with a qualified tax professional or attorney for personalized advice based on your specific circumstances.