Updated October 2026
Not automatically. If the house you're selling has been your main home, federal law lets you exclude up to $250,000 of gain from your income, or up to $500,000 for married couples filing jointly who qualify. You have to pass the IRS eligibility test first. Whether you owe anything comes down to how long you owned and lived in the house, how big your gain really is, and how the house was used along the way.
One thing up front, friend to friend. This is general education, not tax advice and not an estimate of what you'll owe. I'm a REALTOR®, not a CPA. When sellers ask me this, my answer is always the same: take your own numbers to your own tax professional before you list, and again before you file.
The home-sale exclusion, in the IRS's own words
The rule lives in Section 121 of the federal tax code. The statute, 26 U.S.C. § 121(a), says gross income "shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more."
The IRS explains how that works in Publication 523, Selling Your Home. The 2025 edition, prepared for 2025 returns, puts it this way: "To qualify for the maximum exclusion of gain ($250,000 or $500,000 if married filing jointly), you must meet the Eligibility Test." The IRS updates this publication every year, so ask your tax professional which edition applies to your sale year.
Three things trip people up here:
- It's not automatic. You qualify by meeting the tests below, not by selling a house.
- It only covers your main home. Publication 523 says it plainly: "An individual has only one main home at a time." The lake place you visit on weekends doesn't count just because you love it like a main home.
- You don't have to buy another house. The eligibility test looks at how you owned and used the home you're selling. It doesn't ask what you do with the money afterward. Rent for a year, downsize, buy at Lake Martin, travel. The test is the same.
If you're working through the bigger list of selling questions (timing, prep, pricing), my Auburn home seller FAQ is the hub for all of them.
Your gain isn't your sale price (or your check at closing)
This is the part I wish every seller knew before they started doing math at the kitchen table. Publication 523 lays out the formula: "Subtract the adjusted basis from the amount realized to get your gain or loss."
In plain English:
- Amount realized is your selling price minus your selling expenses. Publication 523's worksheet lists selling expenses such as "Any sales commissions (for example, a real estate agent's sales commission)," "Any advertising fees," and "Any legal fees."
- Adjusted basis starts with what you paid for the house. It generally goes up with certain closing costs from your purchase and with improvements, and it can go down with certain adjustments.
- Gain is the gap between the two.
Notice what's missing: your mortgage. Paying off your loan at closing changes how much cash you walk away with. It doesn't change your gain. Sale proceeds, equity, and taxable gain are three different numbers, and only one of them matters for this question.
What counts toward basis
Publication 523 lists settlement fees and closing costs you can include in basis, starting with "Abstract fees (abstract of title fees)" and legal fees for the title search and for preparing the sales contract and deed. Its chart of improvements that increase basis includes a new roof, new siding, insulation, a septic system, and a water heater, along with additions like a bedroom, bathroom, deck, or porch.
The IRS definition is the test: "Improvements add to the value of your home, prolong its useful life, or adapt it to new uses." Routine repairs and upkeep are a different category. Publication 523 even includes a list of improvements you can't include in basis.
My read: if you're tackling a list of what to fix before selling your Auburn home, keep every receipt and invoice in one folder, then let your CPA sort repairs from improvements. Don't assume either way. A shoebox of receipts beats a perfect memory every time (and my memory is not perfect).
What if you sell for less than your basis?
Then you have a loss, and Publication 523 is direct about it: "You can't deduct this loss, but you don't need to pay any tax on the money you received from selling your home." IRS Topic No. 409 says the same thing more broadly: "Losses from the sale of personal-use property, such as your home or car, aren't tax deductible."
The eligibility test, step by step
Publication 523 (2025) breaks eligibility into ownership, residence, and look-back requirements. Here's how each one reads:
- Ownership: you "owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale."
- Residence: you "used it as your residence for at least 24 months of the previous 5 years."
- Look-back: "If you didn't sell another home during the 2-year period before the date of sale," you meet the look-back requirement. But a prior sale alone doesn't disqualify you: the restriction generally applies if you sold another home to which the exclusion applied during that period. Give your CPA the prior-sale dates and whether you excluded gain.
The 24 months don't have to be one continuous stretch. The statute's phrase is "periods aggregating 2 years or more" within the 5-year window.
Married couples and the $500,000 figure
Not every married couple gets the full joint amount. Publication 523 says the maximum joint exclusion applies when "Both spouses meet the residence and look-back requirements and one or both spouses meet the ownership requirement." If you married recently, have your CPA check this before you assume the larger number. For either spouse's recent home sale, bring the sale date and whether gain was excluded; the look-back restriction concerns a sale to which the exclusion applied, not simply a sale.
When you have to move early
Life doesn't always wait two years. Publication 523 says, "You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event." For a job change, one listed situation is a new work location "at least 50 miles farther from the home than your old work location."
A partial exclusion is less than the full amount, and it isn't automatic either. You have to fit one of the IRS situations, and the calculation is its own worksheet.
Military service and surviving spouses
Certain military, intelligence, and Peace Corps personnel can suspend the 5-year test period while on qualified extended duty. Publication 523 says, "The period of suspension can't last more than 10 years. Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years."
For a surviving spouse, the higher exclusion may still be available if, among other conditions, "You sell your home within 2 years of the death of your spouse" and "You haven't remarried at the time of the sale." If that's you, I'm so sorry, and please let a CPA walk through every condition with you.
Rentals, home offices, and second homes
This is where the simple answer gets complicated fast.
Depreciation. If you rented the house out or used part of it for business, Publication 523 says "you can't exclude the portion of gain equal to any section 1250(b)(3) depreciation adjustments allowed or allowable after May 6, 1997." IRS Topic No. 409 adds that unrecaptured section 1250 gain "is taxed at a maximum 25% rate."
Nonqualified use. Publication 523 explains that periods after 2008 when the property isn't used as a principal residence can count as nonqualified use and shrink the share of gain the exclusion covers. But exceptions apply, including the portion of the test window after your last use of the property as a principal residence before the sale. Not every post-2008 rental or absence reduces the exclusion. Have your CPA check the dates and applicable exceptions; the separate depreciation rule still applies.
Second homes. A weekend house at the lake or a game-day condo near campus generally isn't your main home, because you only get one. Those sales need their own calculation.
If you're selling a house that's been a rental, my post on selling a rental with tenants in Alabama covers the selling side. The tax side belongs with your CPA, and it's worth booking that appointment early.
Inherited the house? You start from a different number
Inheritance changes your basis, not the rules about gain. Publication 523 says that for an inherited home, "your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate)."
That fair-market-value starting point can be higher or lower than the decedent's basis. It doesn't make the sale automatically tax-free. If the house sells for more than that basis, the difference can be taxable. An heir's eligibility for the home-sale exclusion depends on the ownership, residence, and look-back rules, including any applicable credited periods, such as a deceased spouse's ownership and use, and special exceptions. Have your CPA check which rules apply.
Gifts work differently. Publication 523 says, "As a general rule, you will use the donor's adjusted basis at the time of the gift as your basis." If a parent is weighing whether to deed the house to you before a move, as in my post on what to do with Mom's house when she moves to assisted living, talk to a CPA and an attorney before any deed changes hands.
For the selling and legal steps, see selling an inherited house in Alabama and Alabama probate, explained in plain English. Those posts cover the process. Your CPA covers the tax.
If some gain is taxable: federal rates
Holding period. IRS Topic No. 409 says, "Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term." Long-term gains get the lower capital-gains rates.
The rates. Topic No. 409 notes, "The tax rate on most net capital gain is no higher than 15% for most individuals." For tax year 2025, a 0% rate applied to taxable income up to $48,350 for single filers and married filing separately, $96,700 for married filing jointly, and $64,750 for head of household. A higher rate applies above the 15% thresholds. These brackets adjust every year, so your CPA will use the ones for your sale year.
Net investment income tax. The IRS explains that this tax "applies at a rate of 3.8%" when modified adjusted gross income exceeds thresholds of $250,000 for married filing jointly, $200,000 for single filers, and $125,000 for married filing separately. The tax applies to the smaller of net investment income or the amount by which modified adjusted gross income exceeds the applicable threshold—not to all income or all sale proceeds. Good news on the excluded part: the IRS says Section 121 "exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT."
What about Alabama?
Alabama has its own income tax, and your CPA should confirm how any gain from your sale lands on your Alabama return. According to the Alabama Department of Revenue, rates for single filers, heads of family, and married filing separately start at 2% on the first $500 of taxable income and reach 5% on "All taxable income over $3,000." For married couples filing jointly, the 5% rate applies to "All taxable income over $6,000."
Selling an Auburn house while living out of state
If you've already moved away, Alabama may require withholding at closing. The Alabama Department of Revenue says, "The rate of withholding is 3 percent or 4 percent of the purchase price," and "An alternative for calculating the withholding is to use the seller's gain."
The department's exemptions page lists a few situations where withholding doesn't apply, including "If the property qualifies as a principal residence within the meaning of Internal Revenue Code Section 121." It also says, "The withholding requirements under this law do not apply to residents of Alabama," and "For transactions after December 31, 2008, the purchase price threshold drops to $300,000." Your closing attorney will handle the forms, and your CPA can tell you whether you'll file an Alabama Form 40NR. My guide to selling your home from out of state covers the rest of the logistics.
Reporting the sale and estimated payments
You may have to report the sale even if most of the gain is excluded, especially if the closing agent files an IRS information return on the sale. Publication 523 walks through the capital-gains forms, including Schedule D, Capital Gains and Losses. Your CPA will know which apply to you.
A big taxable gain can also mean paying during the year instead of waiting until April. The IRS says individuals "generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed." The required payments and penalty safe harbors depend on your income, prior-year return, withholding, and payment timing, so have your CPA calculate your payment schedule rather than treating a general rule as your complete payment requirement.
Alabama runs its own test. The Alabama Department of Revenue says, "Taxpayers must make estimated income tax payments if their estimated Alabama income tax after credits and taxes withheld is expected to exceed $500."
My read: if you expect a taxable gain, ask your CPA about timing before closing, not after. It's a lot easier to plan a payment than to fix a penalty.
What to bring to your CPA before you list
You'll get a better answer, faster, if you show up with:
- The closing statement from when you bought the house
- Receipts and invoices for improvements, with dates
- The dates you moved in and out, and any stretch it was rented or empty
- Any depreciation you claimed for a rental or home office
- The dates of any other home sales in the 2 years before this sale and whether you or your spouse excluded gain
- For inherited property, the date of death and any valuation the estate obtained
- Where you'll be living on closing day
While your CPA runs the tax side, I can pull together a pricing estimate and a realistic net sheet so the two of you are working from real numbers.
The Bottom Line
Selling your main home doesn't automatically mean a capital gains bill. If you meet the ownership, residence, and look-back tests, federal law lets you exclude up to $250,000 of gain, or up to $500,000 for qualifying married couples filing jointly. Rentals, home offices, second homes, inherited houses, and early moves all change the math. Your gain is not your sale price and not your check at closing. And none of this replaces a conversation with your own tax professional.
I'm Amy Cotney, a REALTOR® and licensed real estate salesperson with Roots Real Estate - Investment Development in Auburn. I help sellers across Auburn, Opelika, and Lake Martin get ready for their next chapter, and I'm happy to work alongside your CPA so the selling side and the tax side line up. You can read more about me, or send me a note when you're ready to talk about selling. If you're thinking about buying or selling, reach out. I'd love to help.
Sources
- Internal Revenue Service, Publication 523 (2025), Selling Your Home, for use in preparing 2025 returns: https://www.irs.gov/publications/p523
- 26 U.S.C. § 121, Exclusion of gain from sale of principal residence (Legal Information Institute, Cornell Law School): https://www.law.cornell.edu/uscode/text/26/121
- Internal Revenue Service, Topic No. 409, Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409
- Internal Revenue Service, Questions and Answers on the Net Investment Income Tax: https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax
- Internal Revenue Service, Estimated Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
- Alabama Department of Revenue, What is Alabama's Individual Income Tax Rate?: https://www.revenue.alabama.gov/faqs/what-is-alabamas-individual-income-tax-rate/
- Alabama Department of Revenue, Individual Income Tax Filing Information: https://www.revenue.alabama.gov/individual-corporate/individual-income-tax-filing-information/
- Alabama Department of Revenue, Withholding Requirement on Sales/Transfers of Real Property by Nonresidents: https://www.revenue.alabama.gov/individual-corporate/nonresidentwh/
- Alabama Department of Revenue, Exemptions from Nonresident Withholding Requirement: https://www.revenue.alabama.gov/individual-corporate/nonresidentwhexmpt/
