A married couple filing jointly can exclude up to $500,000 of gain on a main home they owned and lived in for 2 of the last 5 years; everything above that, plus any depreciation taken since May 6, 1997, is taxable (IRS Publication 523, 2025, checked October 14, 2026).
Why the questions have to come before the signature
Most of the tax on a sale is decided by facts that are fixed at closing: who owns the property, how long you lived there, which year the sale closes in, how the price is paid and what records you can produce. After closing, your preparer can only report the result.
A home sale reaches the return as the gross price on Form 1099-S. Selling expenses and the exclusion are entered as adjustments (IRS, Instructions for Form 8949, 2025, checked October 14, 2026). Your basis is your job to prove. The questions below are worth a meeting with your tax professional before you list, and certainly before you sign.
Selling your home: the exclusion and your basis
If you owned and lived in the home for at least 2 of the 5 years before the sale, you may exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly (IRS Publication 523, 2025, checked October 14, 2026; Internal Revenue Code section 121). A surviving spouse who has not remarried keeps the $500,000 limit for a sale within 2 years of the death (section 121(b)(4)).
Gain is the price, minus selling expenses, minus your adjusted basis (IRS Publication 523, 2025). Improvements such as an addition, a new roof or a remodel increase basis; repairs generally do not (IRS Publication 551, 2025). Old receipts can be worth thousands of dollars in tax, as the example below shows. Gather them before listing. See selling a home with a large gain.
Rentals, depreciation and the 3.8% tax
If the property was ever a rental or home office, the depreciation taken (or allowable) since May 6, 1997 cannot be excluded as home sale gain (IRS Publication 523, 2025). For real estate, that part, called unrecaptured section 1250 gain, is taxed at up to 25% (IRS Topic 409, updated September 24, 2026; IRS Publication 544, 2025). See selling a rental property.
The net investment income tax (NIIT) adds 3.8% on the lesser of your net investment income or your modified adjusted gross income (MAGI) above $250,000 for joint filers or $200,000 single. Gain excluded under the home sale rule is not subject to it (IRS, Net Investment Income Tax, updated July 1, 2026).
Medicare two years later, state tax and timing
A large gain raises income on one return, and Medicare premium surcharges (IRMAA, the income-related monthly adjustment amount) generally use the return from two years earlier (SSA, POMS HI 01101.010, checked October 14, 2026). A 2026 sale can raise 2028 premiums. See the 2027 IRMAA brackets.
State tax rules differ widely, and some states have no income tax. Ask your preparer what your state will charge and whether a move before the sale changes it.
Timing matters too. A closing on December 30 and one on January 2 land in different tax years, with different other income and a different Medicare year. In 2026, joint filers pay 0% on long-term gains up to $98,900 of taxable income, 15% up to $613,700 and 20% above (IRS Revenue Procedure 2025-32, October 9, 2025).
Installment sales, inherited property and businesses
An installment sale is a sale where at least one payment is received after the year of sale. Gain can then be reported as payments arrive, but depreciation recapture is reported in the year of sale no matter when the money comes (IRS Publication 537, 2025). The terms must be in the contract before closing.
Inherited property generally takes a basis equal to its value on the date of death (Internal Revenue Code section 1014). Get a date-of-death appraisal. A surviving spouse who owned the home jointly gets a new basis on the deceased spouse's share, and in community property states the whole property can get a new basis (IRS Publication 523, 2025). Try the step-up in basis calculator.
For a business, buyer and seller report how the price is allocated among the assets, and that allocation drives how much is ordinary income versus capital gain (IRS Publication 544, 2025). See selling a business.
When a quick sale is fine
If your gain is well under the $250,000 or $500,000 exclusion, you meet the 2-of-5-year test, the home was never rented and your income is modest, the tax questions may be short. A brief call to confirm is still cheap insurance.
A plain example with numbers
All numbers are hypothetical. A married couple sells the home they have lived in for 25 years for $1,400,000. Selling costs are $70,000. They paid $400,000. Their other income is $132,200, or $100,000 of taxable income after the $32,200 joint standard deduction (IRS, October 9, 2025). The second column assumes they find receipts for $120,000 of improvements before closing. Federal only; state tax not included.
| 2026 sale (hypothetical) | No records | $120,000 of improvements documented |
|---|---|---|
| Price minus selling costs | $1,330,000 | $1,330,000 |
| Less basis | $400,000 | $520,000 |
| Gain | $930,000 | $810,000 |
| Less joint exclusion | $500,000 | $500,000 |
| Taxable gain | $430,000 | $310,000 |
| Federal capital gains tax at 15% | $64,500 | $46,500 |
| MAGI (other income plus taxable gain) | $562,200 | $442,200 |
| NIIT: 3.8% of the lesser of gain or MAGI over $250,000 | $11,864 | $7,304 |
| Total federal tax on the sale | $76,364 | $53,804 |
| Medicare surcharges two years later, both spouses (2026 table as a stand-in) | $12,710 | $12,710 |
The arithmetic: $100,000 of ordinary taxable income plus $430,000 of gain is $530,000, under the $613,700 line, so the gain is taxed at 15%. NIIT: MAGI of $562,200 minus $250,000 is $312,200, which is less than the $430,000 gain, so $312,200 x 3.8% = $11,864. The receipts save $22,560.
Medicare: both MAGI figures fall in the 2026 joint tier above $410,000 and below $750,000, where the surcharge is $446.30 a month for Part B and $83.30 for Part D (CMS, November 14, 2025). That is $529.60 x 12 x 2 = $12,710 a year if both spouses are on Medicare. Spreading the gain or choosing the closing year could change that line; records alone did not.
Red flags
- You plan to tell your preparer about the sale only when you bring in the Form 1099-S.
- No one has asked what you paid for the home or what improvements you made.
- The property was ever rented or used as a home office and no one has mentioned depreciation recapture.
- Your gain is above the exclusion and no one has estimated the 3.8% net investment income tax.
- You or your spouse will be on Medicare in two years and premiums have not come up.
- The closing date was chosen for convenience without looking at which tax year it lands in.
- Seller financing or an installment payment is being negotiated without tax input on the terms.
- You inherited the property or a spouse died and no one has asked for a date-of-death value.
- A widow or widower is selling more than 2 years after the death without checking the $500,000 rule.
- A business sale price is being split among assets by the buyer alone.
Questions to ask before you sign
- What is my adjusted basis, including every improvement, and what records will you need?
- Do I meet the 2-of-5-year ownership and use test for the full exclusion?
- How much of my gain is above the $250,000 or $500,000 exclusion?
- Was any depreciation taken or allowable on this property, and how will it be taxed?
- Will the net investment income tax apply, and on how much?
- What will this sale do to our Medicare premiums two years from now?
- Would closing in December or January change the tax?
- What will my state charge on this gain?
- Would an installment sale lower the total tax, and what must the contract say?
- If this was inherited or a spouse died, what is the new basis and how do we prove it?
- Should I make an estimated tax payment in the quarter the sale closes?
Read This Before You Sign
A one-page checklist: the red flags in annuity and indexed universal life (IUL) sales, and the questions to ask before you sign anything. The questions to settle before you list a home, rental or business: basis, exclusion, recapture, timing. We’ll email it to you.
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Sources
- IRS: Publication 523 (2025), Selling Your Home (updated April 30, 2026)
- Internal Revenue Code section 121, via Cornell LII (checked October 14, 2026)
- IRS: Topic 409, Capital gains and losses (updated September 24, 2026)
- IRS: Net Investment Income Tax (updated July 1, 2026)
- IRS: Revenue Procedure 2025-32, 2026 inflation adjusted amounts (October 9, 2025)
- IRS: Publication 537 (2025), Installment Sales (updated April 30, 2026)
- IRS: Publication 544 (2025), Sales and Other Dispositions of Assets (updated April 30, 2026)
- Internal Revenue Code section 1014, via Cornell LII (checked October 14, 2026)
- CMS: 2026 Medicare Parts A and B Premiums and Deductibles (November 14, 2025)
- IRS: Instructions for Form 8949 (2025) (updated April 30, 2026)
The Retirement Literacy Foundation is a 501(c)(3) public charity. This page is general education, not tax, legal or investment advice. Nothing is sold here, no product is recommended, and RLF accepts no funding from financial companies. Rules and figures change; each one above shows its source and date. Check anything you plan to act on with your state insurance department or a qualified professional who is not paid on the product.