Quick answer

Selling a home located in a different state can create two separate tax issues: (1) federal capital gains reporting and potential tax on the gain, and (2) a state tax or withholding obligation tied to the state where the property is located. States generally tax gains from real estate located in the state regardless of the seller’s residence. Nonresident sellers often need to file a return or submit a withholding form in the state where the property is sold.

Sources: IRS Publication 523 (Selling Your Home); IRS FIRPTA guidance for foreign sellers. (irs.gov)

How federal tax rules apply

  • Capital gains basics: Your taxable gain is the amount realized (sale price minus selling expenses) minus your adjusted basis (original cost plus qualifying improvements and certain closing costs). Selling costs such as real estate commissions reduce the amount realized. See IRS Publication 523 for details on basis, exclusions, and reporting requirements (https://www.irs.gov/publications/p523).
  • Long-term vs short-term: If you owned the property for more than one year, gains are subject to long-term capital gains rates (federal rates of 0%, 15%, or 20% depending on taxable income). Short-term gains (one year or less) are taxed as ordinary income.
  • Primary-residence exclusion: If the home was your primary residence for at least two of the five years before the sale (the ownership and use tests), you may exclude up to $250,000 of gain ($500,000 for married filing jointly) under IRC Section 121. Partial exclusions exist for certain life events (job changes, health issues, unforeseen circumstances). If you meet the ownership-and-use tests and qualify for the exclusion, you may not owe federal tax on most or all of the gain. See IRS Pub 523 for the tests and exceptions.
  • Reporting: If you exclude all the gain under Section 121 and meet the conditions, you generally do not need to report the sale on your federal return. However, you must report the sale on Form 8949 and Schedule D if any portion of the gain is taxable, if you received a Form 1099-S, or if you cannot exclude the gain. See IRS instructions for Forms 8949 and Schedule D.

State tax and withholding issues

  • Where the property is located matters: Most states tax capital gains as part of income derived from property in the state. That means you can owe tax to the state where the real estate sits even if you live in a different state or have moved since the sale.
  • Nonresident filing requirements: Selling real estate in State A while living in State B usually triggers State A filing obligations. States differ: some tax only residents on worldwide income and nonresidents only on income sourced to the state (including property sales); others have additional withholding rules at sale.
  • Withholding at closing: Many states require the buyer or closing agent to withhold a portion of the sale proceeds when the seller is a nonresident. Withholding rates and procedures vary by state. Examples:
  • California and New York have specific withholding rules for nonresidents. The amounts and thresholds differ; sellers can apply for reduced withholding or exemptions in many states.
  • Additionally, federal FIRPTA withholding applies when the seller is a foreign person (nonresident alien); the buyer must generally withhold 15% of the amount realized unless reduced or waived (see IRS FIRPTA guidance).
  • Practical consequence: If state withholding occurs, you may still owe more or be due a refund when you file the nonresident state return. Plan for short-term cash needs at closing.

Sources: state revenue departments; IRS FIRPTA guidance (https://www.irs.gov/individuals/international-taxpayers/firpta-withholding)

Investment property and 1031 exchanges

  • 1031 like-kind exchanges: For qualifying investment or business real estate, a properly structured IRC Section 1031 exchange can defer capital gains tax when you reinvest proceeds into a like-kind property within strict time frames. The 1031 rules apply to real property held for business or investment—not to your personal residence. The Tax Cuts and Jobs Act limited like-kind exchanges to real property.
  • Important practice note: Because 1031 exchanges are complex and time-constrained, most homeowner sales will not qualify. If you do manage a 1031, work with a qualified intermediary and a tax advisor experienced in multi-state exchanges.

Practical examples and common scenarios

  • Moving out of State A and selling there: If you move from Georgia to Florida and sell your Georgia home, Georgia generally taxes gains from real property located in Georgia. You may need to file a Georgia nonresident return and may be subject to Georgia withholding rules at closing. Florida has no state income tax, but that does not eliminate your obligation to Georgia.
  • Selling a rental in a different state: A rental property located in another state will typically produce state-sourced income. You’ll report the gain on your federal return and file a nonresident return in the state where the rental is located. If you used depreciation on the rental, remember you must recapture depreciation at sale (taxed as ordinary income up to certain limits) and report that on your federal return.

Cost-basis, adjustments, and documentation

  • Increase your adjusted basis: Keep records of purchase price, documented capital improvements (not routine repairs), certain settlement costs, and depreciation claimed. Capital improvements raise basis and lower taxable gain.
  • Subtract selling expenses: Commissions, title insurance, advertising, and some closing costs reduce the amount realized.
  • Paperwork at closing: Expect Form 1099-S when gross proceeds are reported to the IRS. If you receive 1099-S and claim the Section 121 exclusion, retain documentation proving eligibility in case of IRS inquiry.

Common mistakes I see in practice

  • Assuming relocation erases state tax obligations: Many sellers believe moving out of the state before closing eliminates tax responsibilities—usually not true.
  • Forgetting withholding: Not planning for state withholding can create cash-flow shocks at closing.
  • Poor recordkeeping: Without receipts for improvements or depreciation schedules for rental property, basis disputes increase your taxable gain.

Practical checklist before you list

  • Determine whether the property was your primary residence and whether you meet the 2-out-of-5-year rule for the Section 121 exclusion.
  • Gather proof of basis and improvements (receipts, contracts, closing statements).
  • Check the destination state’s tax rules and the state where the property is located for nonresident filing and withholding requirements.
  • Ask the title company to confirm whether state or FIRPTA withholding will apply and what forms or certificates you can submit to reduce withholding.
  • Consult a CPA or tax advisor experienced with multi-state real estate transactions.

Strategies to reduce or defer tax (practical, not prescriptive)

  • Use the primary-residence exclusion when eligible—this is the simplest way to eliminate tax on home sale gains for many sellers.
  • Time the sale: If possible, sell in a year when your taxable income is lower to reduce the federal capital-gains rate bracket.
  • Consider converting a rental to a primary residence to meet the 2-out-of-5-year test (this has timing and tax trade-offs—get professional advice).
  • For investment properties, evaluate a 1031 exchange to defer gain; for most homeowners, this is not applicable.

Further reading (internal):

  • Read our glossary entry on capital gains for deeper strategy ideas: Capital Gains (/glossary/capital-gains/)
  • For tactics to reduce tax on property sales, see Strategies to Reduce Tax on Capital Gains from Property Sales (/glossary/strategies-to-reduce-tax-on-capital-gains-from-property-sales/)
  • For timing and planning, see Long-Term vs. Short-Term Capital Gains Tax (/glossary/long-term-vs-short-term-capital-gains-tax/)

Author perspective
In my 15+ years advising clients on interstate real estate sales, the most frequent planning win is good documentation and early coordination with the closing agent and a tax advisor. Clarifying withholding rules before signing a sales contract prevents surprises at closing.

Professional disclaimer
This article provides general information intended for education only and does not constitute tax, legal, or financial advice. Rules change and state procedures differ—consult a licensed tax professional or state revenue department for guidance tailored to your situation.

Authoritative sources

Last reviewed: 2025