The gain formula
IRS Publication 523 walks through it in this order:
- Start with the selling price (Form 1099-S box 2a, if you got one).
- Subtract selling expenses to get the "amount realized."
- Subtract your adjusted basis. The result is your gain or loss.
- Subtract the home-sale exclusion ($250,000, or $500,000 if married filing jointly) if you qualify. What is left is taxable.
| Line | Amount |
|---|---|
| Sale price | $850,000 |
| Selling expenses (commission, deed excise, attorney and so on) | -$50,000 |
| Amount realized | $800,000 |
| Adjusted basis: purchase price $300,000 + closing costs at purchase $5,000 + new roof $15,000 + kitchen remodel $30,000 | -$350,000 |
| Gain | $450,000 |
| Federal exclusion, single owner | -$250,000 |
| Taxable gain | $200,000 |
Every dollar you add to basis or selling costs reduces taxable gain by a dollar. It is worth doing carefully. Use the capital gains calculator once you have your numbers, and see the capital gains guide for rates.
Adjusted basis: what goes in
Basis starts with what you paid, plus certain costs of buying. Publication 523 lists which closing costs count. Then you add the cost of improvements, which Publication 523 defines as work that "adds to the value of your home, prolongs its useful life, or adapts it to new uses."
| Counts as an improvement (adds to basis) | Repair or upkeep (does not add) |
|---|---|
| Room addition, deck, new garage | Repainting a room |
| New roof, new furnace, new central air | Fixing a leak or a broken window |
| Kitchen or bath remodel | Replacing a few shingles |
| Septic system, new well, driveway paving | Routine maintenance |
Publication 523 has the long list of both types. One twist: repairs done as part of a larger improvement project can be added to basis along with the project. The IRS also says improvements that are no longer part of the house, such as carpet that you later replaced, cannot be counted. If you took an energy credit on an improvement, subtract that credit from the amount you add.
Special assessments for local improvements, such as a new sewer line, can also be added. Condo assessments for repairs and maintenance cannot.
Selling costs reduce your gain
Publication 523 lists these as selling expenses: sales commissions, advertising fees, legal fees, mortgage points or loan charges that normally belong to the buyer, and other fees or costs to sell. In Massachusetts that includes your agent commission, your attorney, and the deed excise tax shown on your closing statement. The IRS says they are subtracted from the sale price.
Tax and utility prorations on your closing statement follow their own rules. Ask your CPA how they enter the picture.
Inherited or gifted homes use a different basis
If you inherited the house, your basis is usually its value on the date the owner died, not what they paid. That often removes most of the gain. See inherited house taxes and stepped-up basis. If you received it as a gift, the donor's basis generally carries over, per Publication 523.
What to report to the IRS
Per IRS Topic 701 and Publication 523, you must report the sale if you received a Form 1099-S or if you cannot exclude all of your gain. If you have no 1099-S and all of your gain is excludable, you generally do not report it.
- Form 1099-S. The closing agent reports your gross proceeds to you and the IRS. If you got one, report the sale on Form 8949 even if you have no taxable gain. See the 1099-S instructions.
- Form 8949. Lists the sale. Choose short-term or long-term by how long you owned the home.
- Schedule D (Form 1040). Carries the totals from Form 8949.
- Excluded gain. If your gain is within your exclusion and you got a 1099-S, the excluded amount is handled as an adjustment on Form 8949 and is not taxed. See Publication 523 and the Form 8949 instructions for the exact codes.
What to report in Massachusetts
Massachusetts Form 1 uses your federal numbers. The 2025 Massachusetts Schedule D for long-term gains starts with amounts from your U.S. Schedule D, and the state expects a copy of your U.S. Schedule D attached. Massachusetts follows the section 121 exclusion, so gain you exclude federally is generally excluded for the state too. The state taxes long-term gain at 5% and short-term gain at 8.5%, and a 4% surtax applies over $1,107,750 for 2026. Details are in the capital gains guide.
We looked at the 2025 form. Check the form and instructions for the year you sell, because line numbers change.
Records to keep
Publication 523 says to keep records that show your home's adjusted basis until 3 years after the due date of the return for the year you sold it. Keep, in one folder:
- Your purchase closing statement and deed.
- Receipts, contracts and permits for improvements, with dates and amounts.
- Your sale closing statement and any 1099-S.
- Records of any energy credits, casualty losses or depreciation.
- For inherited property, the date-of-death value (an appraisal or the estate inventory).
If your records are thin, gather bank statements, permits from the town building department, and contractor invoices now, before you sell. A CPA can tell you what is worth reconstructing.