How Buying or Selling a House Affects Your Income Taxes

Buying or selling a home is one of the biggest financial moves most people make—and it can also affect your income taxes. But many homeowners are surprised to learn that the tax benefits are not always as big as they expected—especially when buying a home.

In this post, we’ll walk through the key tax implications for both homebuyers and sellers, address some common misconceptions, and help you understand what really matters when it comes to your tax return.

🏡 Buying a House: Tax Benefits Are Often Smaller Than People Expect

Buying a home doesn’t create any immediate tax liability—but it also doesn’t guarantee you’ll get a big tax break. In fact, most taxpayers won’t see much of a change on their tax return at all.

❗ Most Homebuyers Don’t Get a Tax Break

Many first-time homebuyers are told that they’ll “get to write off the mortgage interest.” While that’s technically true, the reality is this:
Over 85% of taxpayers now claim the standard deduction and do not itemize their deductions. If you take the standard deduction, you don’t get any additional tax break for mortgage interest or property taxes.

So unless your deductible expenses (including mortgage interest, property tax, charitable donations, etc.) are higher than the standard deduction—which is $14,600 for single filers and $29,200 for married couples filing jointly in 2025—you likely won’t see any tax benefit from buying a home.

This can come as a surprise to many first-time buyers.

✅ What If You Do Itemize?

If your itemized deductions do exceed the standard deduction, you may be able to deduct:

• Mortgage interest on up to $750,000 of mortgage debt (or $1 million for older loans).

• Property taxes, up to the $10,000 cap for state and local taxes.

But even then, the benefit often isn’t as large as people expect.

🏠 Selling a House: Will You Owe Capital Gains Tax?

Selling a home may create a taxable gain—but thanks to a special tax rule, many homeowners don’t have to pay tax at all.

1. Capital Gains Exclusion

If the home was your primary residence for at least two of the last five years, you may be able to exclude up to $250,000 of gain from tax ($500,000 if married filing jointly).
This is one of the most generous tax breaks available to individuals.

So if you bought a home for $300,000 and sell it for $700,000, a married couple could potentially avoid tax on the full $400,000 gain.

❗ Common Misconception: Do You Have to Reinvest to Avoid Taxes?

One of the most common misunderstandings we hear is:
“Do I need to buy another house to avoid taxes on the gain?”

The answer is no.

This confusion comes from an old tax rule that required homeowners to “roll over” their gain into another house to avoid tax. That rule was repealed in 1997.

Today, you do not need to buy another home to qualify for the gain exclusion. As long as you meet the ownership and use test, you may exclude up to $250,000 ($500,000 if married) from taxable gain—regardless of what you do with the money.

2. Reporting the Sale

Even if your gain is fully excluded, you might still receive Form 1099-S at closing and need to report the sale on your tax return.

3. Depreciation Recapture

If you rented out part of your home or used it for business (e.g., a home office), you may have taken depreciation deductions. When you sell, you must pay tax on that depreciation, even if your overall gain is excluded.

🧾 Pro Tip: Keep Detailed Records

Save your purchase documents, closing statements, and receipts for major home improvements. These records help you accurately calculate your cost basis and capital gain when you sell.

✅ Final Thoughts

• Most homebuyers won’t see a tax break unless they itemize deductions—and even then, the benefit may be smaller than expected.

• Most home sellers won’t pay tax on the sale if they meet the exclusion rules—and they do not need to buy another home to qualify.

Tax laws around homeownership are generous in some ways—but also full of surprises. Working with a knowledgeable tax advisor can help ensure you make the most of every deduction and avoid common pitfalls.

Need help navigating your home-related taxes?
Contact us today for expert guidance and peace of mind.