Understanding when capital gains tax is due on real estate sales is crucial for property owners aiming to manage their financial obligations. This tax directly affects the net proceeds from a sale, making it essential to understand how and when these taxes apply.
This article examines key aspects of capital gains tax in real estate transactions, including taxable events, timing, installment sales, and the differences between selling a primary residence and other property types.
Sale of Real Estate as a Taxable Event
Real estate sales are considered taxable events under the Internal Revenue Code, which governs the calculation of gains or losses from property sales. The difference between the sale price and the property’s adjusted basis—original purchase price plus improvements minus depreciation—is classified as a capital gain or loss. Gains are taxed at rates that vary depending on how long the property was held. Assets held for more than a year are taxed at long-term capital gains rates, which for 2025 are 0%, 15%, or 20% based on taxable income.
The type of property sold also determines tax implications. Investment properties and second homes are fully taxable, while primary residences may qualify for exclusions under Section 121 of the tax code. Homeowners can exclude up to $250,000 of gain ($500,000 for married couples filing jointly) if they meet ownership and use criteria, requiring them to have owned and used the property as their main home for at least two of the five years prior to the sale.1Internal Revenue Service. Topic No. 701 Sale of Your Home
State taxes further complicate the picture, with rates and rules varying significantly. Understanding both federal and state tax obligations is critical for anyone selling real estate.
Payment Timing and Filing Requirements
Capital gains tax is due in the tax year the property is sold. For example, if a property is sold in 2025, the tax is reported on the seller’s 2025 tax return, typically due in April 2026. Filing for an extension using Form 4868 generally pushes the filing deadline to October 15; this does not extend the time to pay any taxes owed.2Internal Revenue Service. Get an Extension to File Your Tax Return
Taxpayers expecting substantial capital gains may need to make estimated tax payments throughout the year to avoid penalties. These quarterly payments are required if you expect to owe at least $1,000 after accounting for withholding and credits.3Internal Revenue Service. Topic No. 306 Penalty for Underpayment of Estimated Tax
For foreign sellers, compliance with the Foreign Investment in Real Property Tax Act (FIRPTA) is mandatory. FIRPTA generally requires the buyer to withhold 15% of the amount realized on the disposition and remit it to the IRS, ensuring foreign sellers meet their U.S. tax obligations.4Internal Revenue Service. FIRPTA Withholding
How Installment Sales Affect Payment
Installment sales offer a way to manage the tax impact of real estate transactions by spreading payments over several years. This approach allows sellers to pay taxes on the gain incrementally as they receive payments, using the installment method with Form 6252. Under this method, you compute a gross profit percentage (gain divided by contract price) and multiply each payment by that percentage to determine the taxable gain recognized each year.5Internal Revenue Service. Publication 537 Installment Sales
While installment sales offer flexibility and tax planning advantages, sellers must account for the interest component on deferred payments. That interest is taxed as ordinary income, and minimum interest rules may impute interest if a contract rate is too low.
Sale of Primary Residence vs Other Property
Selling a primary residence versus other types of property involves distinct tax considerations. Primary residences often benefit from exclusions that significantly reduce taxable gains. These exclusions, intended to encourage homeownership, allow qualifying sellers to exclude up to $250,000 ($500,000 for married couples) of gain if they meet the ownership and use requirements.
In contrast, gains from selling investment properties or second homes are fully taxable. Additionally, depreciation recapture applies to investment properties, requiring sellers to report depreciation deductions taken during ownership as ordinary income or as “unrecaptured Section 1250 gain,” which is taxed at a maximum rate of 25%. This factor is particularly significant for long-held properties, as accumulated depreciation can substantially increase the taxable amount upon sale.6Internal Revenue Service. Publication 544 Sales and Other Dispositions of Assets