Capital Gains Tax on Home Sales in North Carolina

When you sell your home, the profit is considered a capital gain and can be subject to federal and state taxes. For homeowners in North Carolina, this means navigating Internal Revenue Service (IRS) rules and understanding how the state treats this income. Your potential tax liability depends on the size of your gain, how long you owned and lived in the property, and your filing status.

Calculating the Capital Gain on Your Home

The first step is to calculate the capital gain from the sale. This is determined by a formula: the selling price of your home minus its adjusted basis. The result is your capital gain, which may be taxable depending on other factors.

The selling price is the net amount you receive after subtracting certain selling expenses. These deductible costs include real estate agent commissions, title insurance fees, legal fees, advertising costs, and any transfer taxes paid by the seller. For example, if you sell your home for $400,000 and incur $25,000 in closing costs, your selling price for tax purposes is $375,000.

The adjusted basis starts with the original purchase price of the home. To this cost, you add amounts spent on capital improvements, which are projects that add value to your home, prolong its life, or adapt it to new uses. Examples of capital improvements include adding a new roof, finishing a basement, or installing a new HVAC system.

Repairs, such as painting a room or fixing a leaky faucet, are routine maintenance and do not increase your adjusted basis. Record-keeping is necessary to substantiate the cost of any capital improvements you include in your basis calculation.

The Primary Residence Exclusion

The primary residence exclusion is a federal provision that North Carolina follows, allowing homeowners to exclude a portion of their capital gain from taxable income. If you meet the requirements, you can exclude up to $250,000 of the gain if you are a single filer, or up to $500,000 if you are married filing a joint tax return. If your gain is below these thresholds, you likely will not owe any tax on the sale.

To qualify, you must satisfy two primary tests: the Ownership Test and the Use Test. The Ownership Test requires that you have owned the home for at least two of the five years leading up to the sale. The Use Test requires you to have lived in the home as your primary residence for at least two of the five years before the sale, and these two years do not need to be continuous.

For a married couple to use the full $500,000 exclusion, both spouses must meet the Use Test, although only one spouse needs to meet the Ownership Test. You can only claim this exclusion once every two years, so you are not eligible if you used it on another home sale within that period.

You may be able to claim a partial exclusion even if you do not meet the full two-year requirements. These exceptions are granted if the sale is due to a change in employment, health reasons, or other unforeseen circumstances defined by the IRS. The amount of the partial exclusion is based on the portion of the two-year period that you met the requirements.

North Carolina’s Taxation of Taxable Gains

Any capital gain not shielded by the primary residence exclusion is considered taxable income. Unlike the federal system, North Carolina does not offer a special, lower tax rate for long-term capital gains.

North Carolina taxes these gains as regular income. The state uses a single, flat income tax rate for all taxpayers, and for the 2025 tax year, that rate is 4.25 percent. Any taxable gain from your home sale is added to your other income and taxed at this rate.

To illustrate, if a single filer has a capital gain of $300,000 from a home sale, applying the $250,000 exclusion leaves a taxable gain of $50,000. At a rate of 4.25%, the state tax liability on this gain would be $2,125.

Reporting the Home Sale on Your Tax Returns

If you can exclude the full amount of your gain, you often do not need to report the sale on your federal tax return. An exception arises if you receive Form 1099-S, “Proceeds from Real Estate Transactions,” which reports the gross proceeds from the sale to you and the IRS.

If you have a taxable gain, you must report the sale details on Form 8949, “Sales and Other Dispositions of Capital Assets.” The totals from Form 8949 are then transferred to Schedule D, “Capital Gains and Losses,” which is filed with your Form 1040.

For your North Carolina state tax return, the process is more direct as the calculation begins with your Federal Adjusted Gross Income (AGI). Since the taxable portion of your gain is included in your federal AGI, it automatically flows to your state return, Form D-400. The federally determined figure is the basis for the state tax calculation.