Do I Have to Pay Taxes on Money Made from Selling My Home? A Guide for Tennessee Homeowners

Short Answer: You may have to pay taxes on the profit from selling your home, but many homeowners qualify for a capital gains tax exclusion of up to $250,000 (or $500,000 for married couples) if the home was their primary residence for at least two of the last five years. Selling your home can be a profitable experience, especially in today’s real estate market. But when that final check hits your bank account, many homeowners in Tennessee find themselves asking a critical question, do I have to pay taxes on the money I made from selling my home? The short answer is: it depends. While the IRS may treat the sale of your home as a taxable event, many homeowners qualify for exclusions or benefits that significantly reduce or even eliminate the tax burden. In this guide, we’ll break down when and why you might owe taxes, how exemptions work, and what steps you can take to minimize your tax liability. Whether you’re selling your forever home, downsizing, or working with Tennessee Cash For Homes, this blog is designed to help you navigate the financial implications of your home sale.

Understanding Capital Gains on a Home Sale

The key tax you may owe after selling your home is the capital gains tax. This tax applies to the profit you earn from the sale of a capital asset in this case, your house. The gain is calculated by taking your selling price and subtracting the home’s purchase price and any qualifying expenses such as improvements or closing costs. For example, if you bought a home in Murfreesboro for $200,000 and sold it for $350,000, your profit would be $150,000. That’s the amount potentially subject to capital gains tax. However, homeowners are often eligible for what’s known as the capital gains exclusion, which can significantly reduce or eliminate the amount you owe.

The Capital Gains Exclusion: What It Is and Who Qualifies

One of the most beneficial tax breaks for homeowners is the IRS capital gains exclusion. If you meet certain conditions, you can exclude up to $250,000 of profit if you're single, or up to $500,000 if you're married and filing jointly. This is not a deduction it’s a full exclusion, meaning that portion of your profit isn’t taxed at all. To qualify, you must have owned the home and used it as your primary residence for at least two out of the five years before the sale. These two years do not have to be consecutive. If you meet the criteria, you can use the exclusion multiple times, though not more than once every two years.

When You Might Owe Taxes on the Sale of Your Home

Even with the exclusion, there are scenarios where you could owe capital gains taxes. If your profit exceeds the $250,000 or $500,000 threshold, the excess is taxable. For example, if a married couple sells their Nashville home and earns $600,000 in profit, they may owe capital gains taxes on the $100,000 that exceeds their exemption. You may also owe taxes if the home wasn’t your primary residence, or if you didn’t live in the home for the required two-year period. This is common with rental properties, vacation homes, or inherited properties sold shortly after acquisition. In these cases, the IRS treats the property differently and taxes may apply unless the sale qualifies for special circumstances or exceptions.

How Home Improvements Can Lower Your Taxable Gains

It’s important to keep records of any improvements you made to the property while you owned it. Home improvements, not regular maintenance, can increase your property’s cost basis, which reduces the overall capital gain. For instance, adding a deck, finishing a basement, upgrading the roof, or remodeling a kitchen all count toward your cost basis. If you spent $40,000 on major improvements over the years, that amount is deducted from your profit, reducing your taxable gain. The IRS recommends keeping documentation like receipts, contracts, and permits for all significant home upgrades. This strategy can make a big difference when it comes time to calculate your tax obligation.

Selling an Inherited Home: Tax Implications in Tennessee

Inheriting a home comes with a different tax treatment. You don’t pay inheritance tax at the federal level, and Tennessee has no state inheritance tax either. However, if you sell the inherited property, you may be responsible for capital gains tax based on the property’s stepped-up basis. This means the IRS adjusts the home’s value to its fair market value at the time of inheritance, not when the deceased originally purchased it. If you sell the home soon after inheriting it and the sale price is close to the stepped-up value, there’s likely little to no taxable gain. This rule is beneficial for Tennessee homeowners who inherit property and want to sell it quickly, especially when working with trusted buyers like Tennessee Cash For Homes.

What About Selling a Home for Cash?

If you sell your home for cash, the same tax rules apply. You will still need to report the sale to the IRS and determine if you owe capital gains tax based on the profit you made. The only difference is that the transaction is likely to close faster, with fewer fees, and without agent commissions. Companies like Tennessee Cash For Homes offer homeowners a quick way to liquidate their property without traditional delays. Just because it’s a cash sale doesn’t mean it’s under the table, it’s still a taxable transaction if it meets IRS requirements.

Can You Reduce or Avoid Taxes by Selling in Special Circumstances?

Yes, the IRS provides partial exclusions if you’re selling due to a major life event such as a job change, health issue, or divorce. If you don’t meet the full two-year ownership and residency test but are forced to move due to these reasons, you may still be eligible for a partial capital gains exclusion. This is calculated based on how long you lived in the home compared to the full two-year requirement. These exceptions offer valuable relief for homeowners in Tennessee who must sell unexpectedly, especially when working with cash buyers to expedite the process.

Reporting the Sale on Your Taxes

When you sell your home, your closing agent or real estate professional may issue you a Form 1099-S, which reports the gross proceeds of the sale. If you receive this form, you are required to report the sale on your federal tax return using IRS Form 8949 and Schedule D. However, if you meet all the criteria for the capital gains exclusion and don’t receive a 1099-S, you may not need to report the sale at all. It’s always best to consult a tax professional or CPA familiar with real estate sales in Tennessee to ensure you're in compliance.

Working with Cash Buyers and Staying Tax Compliant

Selling to a reputable company like Tennessee Cash For Homes doesn’t just make the process faster, it also makes it easier to document. A legitimate cash buyer will provide a purchase agreement, a closing statement, and all necessary tax documents to ensure the sale is properly recorded and reported. Whether you're trying to avoid foreclosure, dealing with probate, or simply want a quick sale, working with experienced professionals helps you stay financially and legally protected.

Final Thoughts: Do You Have to Pay Taxes on Money Made from Selling Your Home?

For most Tennessee homeowners, the capital gains exclusion means that taxes on home sale profits are not something to worry about, especially if the home was your primary residence and your gain falls under the IRS threshold. However, if you’re selling an investment property, inherited home, or highly appreciated asset, it’s smart to understand your tax obligations ahead of time. Keeping records of home improvements, timing your sale strategically, and consulting with a tax advisor are all important steps in maximizing your return while minimizing your tax bill. And when you need to sell quickly, Tennessee Cash For Homes is ready to help guide you through a clean, fast, and transparent transaction.

Planning Your Next Home Sale with Confidence

If you’re navigating the financial side of a home sale, understanding your tax exposure is just part of the picture. Our guide on Selling a House in Probate offers key insights for inherited properties. You may also find value in Selling Your Home in Tennessee: Understanding Market Trends and Cash Sale Benefits, which explores current market conditions and how they affect your sale.

No matter your reason for selling, Tennessee Cash For Homes is here to make sure you get a fair offer with full transparency, and we’re always ready to answer your questions about taxes, timelines, and the best way forward.