General information, not tax or legal advice

Capital Gains Tax When You Sell a Home in Tennessee

A common question for Manchester and Coffee County sellers is whether they will owe tax on the money from their sale. For many people selling the home they live in, the answer is no federal tax on most or all of the gain, because of the IRS home sale exclusion. But the rules have tests, exceptions and reporting steps, and it is worth knowing them before you list.

This guide explains what the IRS says in Publication 523, Selling Your Home, and related IRS pages, plus what the State of Tennessee says. It is general information, not tax or legal advice. A tax professional is the right person to apply these rules to your sale.

The short answer

IRS Topic 701 says that if you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 if you file a joint return with your spouse. Only gain above your exclusion limit is taxable, unless part of the gain comes from business or rental use of the home.

On the state side, the Tennessee Department of Revenue says the Hall income tax, which was imposed only on interest from bonds and notes and dividends from stock, was repealed for tax periods that begin on January 1, 2021, or later. The Air Force's official benefits site says Tennessee does not have a general state income tax and residents do not have to file an individual state income tax return.

Who qualifies for the full exclusion

Publication 523 walks through an eligibility test. In plain terms:

• 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, which is the date of closing. For a married couple filing jointly, only one spouse has to meet this.
• Residence. You used the home as your residence for at least 24 months of the previous 5 years. The months do not have to be in a single block; a total of 730 days is what counts. For a married couple filing jointly, each spouse must meet the residence requirement individually to get the full $500,000.
• Look back. Topic 701 says you generally are not eligible if you excluded gain from the sale of another home during the two year period before this sale.
• Main home only. The exclusion is for your main home. Publication 523 says an individual has only one main home at a time.
• Automatic disqualifications. The exclusion does not apply if you got the property through a like kind exchange (a section 1031 exchange) during the past 5 years, or if you are subject to the expatriate tax.

Topic 701 adds that you can meet the ownership and residence tests during different 2 year periods, as long as both are met during the 5 years ending on the date of sale. Publication 523 also says a vacation or other short absence counts as time you lived at home, even if you rented the home out while you were gone.

How your gain is figured

Publication 523 lays out the math this way: your selling price, minus your selling expenses, is your amount realized. Your amount realized, minus your adjusted basis, is your gain or loss.

Selling expenses

The IRS worksheet lists costs directly tied to selling your home, such as real estate sales commissions, advertising fees, legal fees and mortgage points or other loan charges you paid that would normally have been the buyer's responsibility. It also says that transfer taxes, stamp taxes and similar fees you pay as the seller can be treated as selling expenses. My seller closing costs guide explains the costs that usually show up on a Tennessee settlement statement.

Your basis

Your basis starts with what you paid for the home, including your down payment and any amount you borrowed. Publication 523 says some settlement costs from your purchase can be added, including abstract fees, charges for installing utility services, legal fees (including the title search and preparing the sales contract and deed), recording fees, survey fees, transfer or stamp taxes, and owner's title insurance.

Some purchase costs cannot be added. The IRS lists fire and casualty insurance premiums, rent or utilities for living in the house before closing, and charges for getting a mortgage loan, such as mortgage insurance premiums (including the VA funding fee), loan assumption fees, the credit report, a lender required appraisal, points and refinancing fees.

Improvements add to basis, repairs do not

The IRS says improvements are work that adds to the value of your home, prolongs its useful life or adapts it to new uses. Its examples include additions such as a bedroom, bathroom, deck, garage or porch; a new roof or siding; storm windows; central air conditioning, a furnace or duct work; wiring; a septic system, water heater or filtration system; built in appliances, kitchen modernization and flooring; and landscaping, a driveway, a fence or a swimming pool.

Repairs and maintenance that keep your home in good condition but do not add value or prolong its life cannot be added. The IRS gives painting, fixing leaks and filling holes or cracks as examples. Repair type work can count when it is part of a larger remodeling job; the IRS example is that replacing a broken windowpane is a repair, but replacing that window as part of replacing all the windows in the home is an improvement.

This is why improvement receipts matter so much. If you are getting ready to sell, my prepare to sell checklist is a good place to start gathering papers.

If you sell at a loss

Publication 523 says that if your adjusted basis is greater than your amount realized, you sold at a loss. You cannot deduct that loss, but you do not need to pay any tax on the money you received from selling your home. IRS Topic 409 also says losses from selling personal use property, such as your home, are not tax deductible.

If you do not meet the 2 year tests

You may still qualify for a partial exclusion. Publication 523 says you can meet the requirements if the main reason for the sale was a change in workplace location, a health issue or an unforeseeable event. The partial amount is figured on the IRS worksheet.

• Work related move. For example, you took or were transferred to a new job at least 50 miles farther from the home than your old work location. This can also apply to your spouse, a co owner or anyone else for whom the home was their residence.
• Health related move. For example, you moved to obtain or provide diagnosis, treatment or care for yourself or a family member with a disease, illness or injury.
• Unforeseeable events. The IRS list includes the home being destroyed or condemned, a casualty loss from a natural or man made disaster, and a death, divorce or legal separation, becoming eligible for unemployment compensation, or a change in employment that leaves the household unable to pay basic living expenses, among others.

Publication 523 says that even if your situation does not match one of the listed events, you may still qualify if you can show the primary reason for the sale, based on the facts and circumstances, was work related, health related or unforeseeable.

Military, Foreign Service and intelligence community sellers

With Arnold Air Force Base next door, this one matters here. Topic 701 says that if you or your spouse are on qualified official extended duty in the Uniformed Services, the Foreign Service or the intelligence community, you may elect to suspend the five year test period for up to 10 years. You are on qualified official extended duty if, for more than 90 days or for an indefinite period, you are at a duty station at least 50 miles from your main home or living in government housing under government orders.

Publication 523 adds that the suspension cannot last more than 10 years, so the suspension and the 5 year test period together can reach back no more than 15 years. You can suspend the 5 year period for only one property at a time, and you can revoke the choice at any time.

Rental use, a home office and depreciation

If you rented out your home or used part of it for business, the rules get more detailed:

• Depreciation. Publication 523 says that if you were entitled to take depreciation deductions for business or rental use of your home, you cannot exclude the part of your gain equal to any depreciation allowed or allowable for periods after May 6, 1997. That part may need to be paid back, which the IRS calls recapture.
• Nonqualified use. If, after 2008, you did not use the home as your main home for a period, part of the gain may not be eligible for the exclusion. Publication 523 explains that time after you last lived in the home as your main home, before you sold it, generally does not count as nonqualified use.

If you rented the home out or claimed a home office, bring those records to your tax professional before you list.

Land next to your home

If your home sits on acreage, Publication 523 says you can include the sale of vacant land next to your home as part of the home sale if you owned and used the land as part of your home, the land and home sales happen within 2 years of each other, and both sales meet the eligibility test or qualify for a partial exclusion. The two sales are then treated as a single transaction, so the exclusion can be used only once. My guide to selling land in Coffee County covers the rest of a land sale.

If part of the gain is taxable

IRS Topic 409 explains that gain on property held more than one year is generally long term, and net capital gain may be taxed at a lower rate than ordinary income. For tax years beginning in 2025, Topic 409 lists rates of 0 percent, 15 percent or 20 percent depending on taxable income, and says the portion of unrecaptured section 1250 gain is taxed at a maximum 25 percent rate. Net short term capital gains are taxed as ordinary income. Topic 409 also says you may be required to make estimated tax payments if you have a taxable capital gain.

What about the net investment income tax? The IRS says it does not apply to any amount of gain that is excluded from gross income for regular income tax purposes, so gain covered by the home sale exclusion is not subject to it. Gain above the exclusion can be, depending on your income.

Reporting the sale and Form 1099 S

Publication 523 says you need to report the sale on your tax return if any of these is true:

• You have taxable gain and cannot exclude all of it
• You received Form 1099 S, Proceeds From Real Estate Transactions; then you must report the sale on Form 8949 even if you have no taxable gain
• You choose to report the gain as taxable even though it could be excluded, for example because you plan to sell another main home within 2 years and expect a larger gain on that sale

If none of these is true, Publication 523 says you do not need to report your home sale on your tax return. When reporting is required, Topic 701 says to use Schedule D (Form 1040) and Form 8949.

Who sends Form 1099 S? The IRS instructions say the person responsible for closing the transaction, generally the settlement agent named on the Closing Disclosure or other settlement statement, is the one required to file it. The instructions also say a sale of a main home for $250,000 or less ($500,000 or less if the seller is married) is not reportable if the closing agent receives an acceptable written certification from the seller, signed under penalties of perjury, that the full gain is excludable and that there has been no period of nonqualified use after December 31, 2008. Joint sellers each have to sign one. Your closing attorney or title company can tell you whether they will ask you for one.

Special situations

• Surviving spouses and care facility time. Publication 523 has special rules for a surviving spouse and for a seller who became unable to care for themselves. My downsizing guide explains both.
• Inherited homes. The basis of an inherited home is generally its fair market value on the date of death. See my guide to selling an inherited home in Tennessee.
• Divorce. Publication 523 says a transfer of your home to a spouse or ex spouse as part of a divorce settlement is generally treated as no gain or loss, with an exception if the spouse is a nonresident alien.
• THDA and other bond financed loans. If you bought with a loan from tax exempt mortgage bonds or a mortgage credit certificate, you may owe a recapture tax when you sell within 9 years, even if your gain is excluded. My selling a house with a mortgage guide explains it.
• Installment sales. If part of the price is paid in a later year, Topic 701 says the sale is an installment sale and the home sale exclusion remains available.

Keep your records

Publication 523 says that any time you buy real estate, you should keep records that document the property's adjusted basis, and in general keep them until 3 years after the due date of your tax return for the year you sell. That means your purchase settlement statement, receipts for improvements, and your sale settlement statement.

A seller tax checklist

• Find the settlement statement from when you bought the home
• Gather receipts for improvements, such as a new roof, HVAC, additions or a septic system
• Count your months of ownership and residence in the last 5 years
• Note any time the home was rented out or used for business, and any depreciation you claimed
• Ask whether a work, health or unforeseeable event rule or the military suspension could apply
• Ask your closing agent whether you will receive Form 1099 S or sign a certification
• Keep your sale settlement statement with your tax records
• Talk with a tax professional before you list, not after you close

How I help

I am not a tax professional, and I will always point you to one for your own numbers. What I can do is help you get a realistic sale price from recent Coffee County sales, estimate your net after the payoff and closing costs, and make sure your closing attorney or title company has what they need. If timing matters for the 2 year tests, we can plan your list date around it.

Keep reading:

• Sell your home in Manchester
• Selling a house with a mortgage in Tennessee
• Seller closing costs in Tennessee
• How much will I really walk away with?
• Downsizing in Manchester
• Real estate glossary
• All Manchester guides

Fair housing note: I work with every seller and follow the same steps for everyone.

This guide is general information from IRS and Tennessee public sources, not tax or legal advice. Tax rules change and every sale is different, so confirm your situation with a tax professional and your closing attorney or title company.

Wondering what your home could sell for?

Knowing your likely sale price is the first step in figuring your gain. Call or text me at (615) 497 1658, or request your free home value report below.

Common questions

Matt Sargent is a Tennessee licensed affiliate broker with Keller Williams who helps buyers and sellers in Manchester and Coffee County. Call (615) 497 1658 or send a message.