Selling Property? Here’s How to Manage the Tax Ripple

With today’s record-breaking home prices, more sellers are realizing sizable gains. The National Association of Realtors (NAR) reported that in June 2025, the average home price hit $435,300, a historic high for that month, and the 24th consecutive month of year-over-year price increases. While selling a home or investment property can unlock a pile of cash, it also triggers tax responsibilities. Mapping the tax landscape before deciding what to do with the proceeds can help sellers reap the most benefit for their situation.

Understand Which Taxes Apply

Primary home sale:

The sale of a primary residence may qualify a seller to exclude up to $250,000 in gain, if single, or $500,000, if married filing jointly. The seller must have occupied the property as their main residence for at least two years out of the five years preceding the sale.  Keeping records of improvements and timing helps to support eligibility. The Internal Revenue Service outlines this under Section 121. Qualified use is crucial for receiving the full exclusion, so sellers should familiarize themselves with the code and consult a financial advisor or tax professional to understand how it applies to their specific circumstances.

Rental or investment property:

Investment and rental property sales are subject to capital gains tax, typically at a rate of 0%, 15%, or 20%, depending on the income level. Additionally, any depreciation previously claimed is “recaptured” and taxed at a rate of up to 25%, regardless of changes in tax brackets.

Additional Taxes

High earners may face a 3.8% Net Investment Income Tax (NIIT) if their modified adjusted gross income exceeds $200,000 (single), or $250,000 (married filing jointly). The IRS calculates NIIT based on the lesser of the seller’s investment income or the amount of income that exceeds the threshold. Large gains may carry penalties for underpaying estimated tax. The underpayment interest rate for 2025 is 7% per year, compounded daily. Sellers must pay at least 90% of the current-year tax or 100% (110% for high earners) of the previous year’s tax to avoid these penalties.  

The Importance of Timing and Measurement

Because underestimating tax responsibility on gains can result in thousands of dollars in additional costs, sellers should accurately tally the purchase price, renovation costs, and closing fees to improve the accuracy of their taxable gain estimate. For rented properties or office-use situations, the IRS may reduce the main-home exclusion according to the “non-qualified use” rule, which shrinks the home-sale exclusion if the seller previously rented or used a house for something other than the main residence. In this situation, the IRS prorates the exclusion by a fraction using the following equation:

• numerator = days of non-qualified use after 2008
• denominator = total days the seller owned the property

This fraction multiplied by the seller’s gain (after subtracting any allowable depreciation), and that result is the “nonqualified use gain” that cannot be excluded. The remainder of the gain may still qualify for the exclusion. IRS Publication 523 walks through this worksheet step by step.

Smart Moves to Defer or Reduce Taxes When Selling a Home

Sellers may not be able to eliminate tax liability on their gains, but some strategies can shift it.  

• “Like-kind” real estate: The 1031 Exchange provision in the IRS code allows sellers to roll gain proceeds into a similar investment property and defer taxes. A strict timeline and the use of a qualified intermediary apply to execute the provision properly.
• Opportunity zone funds: Sellers can reinvest in a Qualified Opportunity Fund (QOF) within an allowed period and potentially defer gain recognition until the latest permitted date. QOFs are investment vehicles designed to encourage investment in economically distressed areas known as Qualified Opportunity Zones (QOZs).

What to Avoid When Selling a House

• Mixing proceeds with personal funds: This can disqualify a seller’s 1031 Exchange.
• Overlooking state tax rules: Many states treat gains differently from the IRS.
• Assuming that moving resets the exclusion: A seller cannot qualify for the exclusion if they claimed it on another property within the past two years, regardless of whether they move to a new property.

What to Do Next 

1. Estimate owed tax: Begin with the sale price minus the documented basis (original purchase price plus verified improvement costs minus any depreciation taken) to calculate capital gain. Apply the capital gains tax rate, account for depreciation recapture (if the property was used at any point as a rental or business), and NIIT (if applicable).
2. Adjust the tax payments: Boost withholding or file estimated payments to meet IRS safe harbors and avoid penalties.
3. Align reinvestment plans with goals: Before purchasing another property, sellers should compare the after-tax cash flow from that new investment (proceeds after expenses, taxes, and financing costs) with other potential investments to determine which better matches their financial goals. If retirement is on the horizon, sellers might prioritize building cash reserves and exploring tax-efficient income strategies. Rebalancing real estate holdings might be another consideration, especially with home prices up about 4% year-over-year in the first quarter of 2025.

Selling a property can greatly improve your financial future through smart tax strategies. SHP Financial can help you estimate your tax impact, explore deferral options like 1031 Exchanges or QOFs, and develop a reinvestment plan aligned with your goals. Contact an SHP Financial advisor today for a free review of your portfolio, and let your property sale open the door to new financial possibilities.