Selling real estate can yield substantial profits, but tax obligations can shrink your net proceeds if you’re not prepared. Understanding the various taxes, reporting requirements, and strategic planning opportunities is vital to protect your gains and maximize your return in 2025.

Types of Taxes on Real Estate Sales

When you sell property, multiple taxes may apply. Each category can affect your bottom line, so it’s important to recognize every potential cost.

• Capital Gains Tax: The primary federal tax on profit from real estate sales.
• State Income or Capital Gains Taxes: Many states tax gains as regular income, with rates varying widely.
• Additional Surcharges and Fees: Net Investment Income Tax (NIIT), depreciation recapture, and local transfer taxes could also apply.

Understanding Federal Capital Gains Tax

Selling property held for one year or less triggers ordinary income tax rates of 10%–37%. If you hold the property longer than one year, you receive preferential long-term rates of 0%, 15%, or 20%, depending on your taxable income.

The 2025 long-term capital gains brackets are shown below:

High earners may also owe the 3.8% Net Investment Income Tax (NIIT) if modified adjusted gross income exceeds $200,000 for singles or $250,000 for married couples filing jointly. Combined with the 20% rate, NIIT can push your effective rate to 23.8%.

Calculating Your Taxable Gain

To determine your capital gain:

Adjusted Basis = Purchase Price + Improvements + Transaction Costs – Depreciation

Then compute:

Capital Gain = Final Sale Price – Adjusted Basis

• Purchase price and closing costs
• Permitted home improvements and additions
• Deductible selling expenses (commissions, staging, repairs)
• Depreciation claimed on rental properties

Every qualified expense reduces your net gain and thus your tax liability. Detailed recordkeeping is essential to substantiate your basis and lower taxable income.

Primary Residence Exclusion

Homeowners may exclude up to $250,000 (single) or $500,000 (married filing jointly) of gain if they owned and lived in the property for at least two of the five years before sale. This powerful exclusion does not apply to rental or investment properties.

Qualification criteria include:

• Ownership and use of the home as your primary residence for at least two years.
• No exclusion claimed on another home sale during the prior two years.
• Limit applies to individual filers and joint returns separately.

Additional Tax Considerations

If you’re selling an investment or rental property, prior depreciation deductions are subject to a depreciation recapture rate up to 25%. This amount is added to your income and taxed accordingly.

Other surcharges may include state-level transfer taxes or local documentary fees. Research your jurisdiction’s requirements to avoid surprises at closing.

Property Tax Apportionment

At closing, property taxes are typically prorated between buyer and seller based on days of ownership. Each party deducts only their share on their tax return. Be sure your closing statement accurately reflects this division to support your deductions.

Reporting Requirements

Report gains and losses on IRS Form 8949 and Schedule D. If you qualify for the primary residence exclusion, you generally report less by excluding eligible gains—but if your gain exceeds the exclusion limit, full reporting is required.

Strategies to Minimize Your Tax Bill

With careful timing and planning, you can reduce taxes owed and retain more profit:

• Time the sale in a lower-income year to fall into a lower capital gains bracket.
• Maximize your adjusted basis by documenting every cost and improvement.
• Consider a 1031 exchange to defer taxes on investment property sales.
• Sell only after two years of ownership to qualify for the primary residence exclusion.

Example Calculation

Jane purchased a rental home in 2015 for $300,000. She claimed $60,000 in depreciation and spent $40,000 on improvements over the years. In 2025, she sells the property for $550,000 and pays $33,000 in commissions and closing costs.

Her adjusted basis is $300,000 + $40,000 – $60,000 = $280,000. After deducting selling costs, her net sale price is $517,000. Her capital gain is $517,000 – $280,000 = $237,000.

If Jane’s income puts her in the 15% long-term bracket, she owes $35,550 in federal capital gains tax plus $9,006 in NIIT (3.8% of $237,000), for a total federal tax bill of $44,556.

Conclusion

Understanding the full spectrum of taxes when selling real estate empowers you to make informed decisions, document every expense, and implement strategies that minimize liability. By planning ahead, tracking your costs diligently, and taking advantage of exclusions and deferrals, you can protect your profits and achieve a successful, tax-efficient sale.