Updated: October 21, 2026 · By Mark Dietel, Broker/Owner, Mark Dietel Realty · 7-minute read
Quick answer: Most Indiana homeowners owe no tax on a home sale. The IRS excludes up to $250,000 of gain, or $500,000 on a joint return, if you pass the ownership-and-use test, and Indiana follows suit because its income tax starts from federal adjusted gross income. Renting the house out first is what usually changes the answer.
What we analyzed: IRS Topic 701 and Publication 523 (the home-sale exclusion), Indiana Code 6-3-1-3.5 and 6-3-2-1 (Indiana adjusted gross income and its tax rate), and the Indiana REALTORS Housing Hub report for Johnson County, August 2026.
Key takeaways
- The Section 121 exclusion covers up to $250,000 of gain for a single filer and $500,000 for a joint return (IRS Topic 701).
- You qualify by owning the home and using it as your main residence for at least two of the five years before the sale. The two stretches do not have to be the same months.
- Gain equals the sale price, minus selling expenses, minus your adjusted basis. Your mortgage payoff is not part of it.
- Renting the house before you sell can shrink or end the exclusion, and depreciation you claimed as a landlord is taxed at sale.
- Indiana has no separate capital-gains tax. Gain the IRS excludes stays out of Indiana income too; gain it does not exclude is taxed at Indiana's flat rate plus your county's income tax.
Do I owe capital-gains tax when I sell my home in Indiana?
Usually not on your main home. Federally, a single filer can exclude up to $250,000 of gain and a married couple filing jointly up to $500,000 if they meet the ownership and use test in IRS Topic 701. Indiana then starts its own income tax from federal adjusted gross income under Indiana Code 6-3-1-3.5, so gain the IRS excludes never enters your Indiana return. Indiana has no separate capital-gains rate.
Gain that is not excluded is a different story. It flows into Indiana adjusted gross income and is taxed at the state's flat individual rate under Indiana Code 6-3-2-1, plus the local income tax your county sets, whether you live in Marion, Johnson or Monroe County. Our read: Johnson County's August 2026 median sale price was $330,000, per the Indiana REALTORS Housing Data Hub, below the joint exclusion on its own, so for most local owners the question is whether they qualify, not whether they hit the cap. Run your own numbers.
The exclusion can generally be used once every two years. A second home, an investment property, or a house that fails the residence test does not qualify. Even a fully excluded sale must be reported if the closing agent issues you a Form 1099-S.
How is the gain actually calculated?
Start with the sale price, subtract selling expenses, then subtract your adjusted basis. Basis starts with what you paid and grows with qualifying capital improvements.
How is the gain actually calculated?
| Gain worksheet line | What goes in it |
|---|---|
| Sale price | The contract price the buyer pays |
| Selling expenses | The transaction items on your settlement statement; a written net sheet lists them line by line |
| Original cost basis | What you paid when you bought, plus certain purchase costs |
| Capital improvements | A new roof, an addition, HVAC replacement, a finished basement (keep the receipts) |
| Not improvements | Repairs and upkeep: paint, patches, fixing what broke |
| Adjustments | Depreciation claimed for a rental period or home office lowers basis |
| Gain | Sale price, minus selling expenses, minus adjusted basis |
Keep every improvement receipt for as long as you own the house; receipts raise your basis.
What is the 2-of-5-year rule, and what if I rented the house out?
The test has two parts. You owned the home for at least 24 months of the five years before the sale, and you lived in it as your main home for at least 24 months of that same window.
Renting is where sellers get surprised. Once you move out and lease the house, your residence months stop adding up while the five-year window keeps moving. If you lived there at least two years before moving out, selling within three years of the move generally still passes. Hold the rental longer and the exclusion is gone. Depreciation claimed during the rental years is taxed separately at sale even when the rest of the gain is excluded. See Should I Rent Out My House or Sell It in Indianapolis? and How Do I Sell a House With Tenants Living in It in Indiana?
What does this look like in Central Indiana?
A hypothetical Greenwood couple bought in 2012, put in a new roof and HVAC system, and sells in 2026 at a price near Johnson County's August 2026 median. Here is how the worksheet reads.
What does this look like in Central Indiana?
| Line | Hypothetical amount |
|---|---|
| Purchase price (2012) | $195,000 |
| Roof and HVAC improvements | $25,000 |
| Adjusted basis | $220,000 |
| Sale price (2026) | $340,000 |
| Selling expenses | from your written net sheet (enter yours) |
| Sale price minus adjusted basis (before selling expenses) | $120,000 |
| Joint exclusion available | $500,000 |
If they meet the two-of-five-year test and have not used the exclusion in the past two years, they owe no federal capital-gains tax. Had they rented the house out for most of the last decade, the same sale could lose the exclusion and add depreciation recapture.
Sell now, or keep renting?
Sell now, or keep renting?
| Sell now if | Keep renting if |
|---|---|
| You moved out within the last three years and lived there at least two of the five years before the sale | You already passed the three-year point, so the exclusion is gone either way |
| Your gain is large enough that losing the exclusion would cost more than a year of rent | The rent covers the payment and you want the property for the long run |
| You want to stop adding depreciation that will be taxed at sale | You have a CPA plan for depreciation recapture or an exchange |
When this doesn't apply
Different rules cover inherited homes, which generally get a stepped-up basis (see Inherited a House in Indiana? What to Know Before You Sell), investment property, 1031 exchanges, homes partly used for business, divorce transfers, and sales within two years of a prior exclusion. If any of these fit, talk to a CPA before you list.
What to do next
Bring two things to your CPA: your improvement receipts and a written estimate of what you would net from the sale.
Prefer to talk? Call (317) 426-9911. Mark Dietel Realty has offices in Southside Indianapolis, Greenwood and Bloomington.
Read next
- Should I Rent Out My House or Sell It in Indianapolis?
- How Do I Sell a House With Tenants Living in It in Indiana?
- What Is a Seller Net Sheet in Indiana and What Goes Into It?
FAQ
What is a Form 1099-S and will I get one?
It is the IRS form a closing agent may file to report your sale price. If you receive one, report the sale on your return even when the whole gain is excluded. For qualifying main homes, closing agents often skip the form when you certify at closing that the exclusion applies.
Do I pay capital-gains tax on an inherited house?
Usually less than people expect. Inherited property generally takes a stepped-up basis, meaning its value at the owner's death, so tax mostly applies to growth after that date. The two-of-five-year rule works differently for heirs, and estates vary, so bring in a CPA early.
What if I lived in the house less than two years?
You may still get a partial exclusion if the early sale came from a job move, a health reason, or certain unforeseen events, prorated by the months you lived there. A voluntary early move without a qualifying reason gets no exclusion. IRS Publication 523 lists them.
Does paying off my mortgage change my taxable gain?
No. The payoff changes your cash at closing, not your gain. Gain compares the sale price and selling expenses with your basis, and the loan is not in that formula.
This is general information, not legal, tax or appraisal advice. Confirm your situation with a CPA, the Indiana Department of Revenue or an attorney.
Mark Dietel Realty — offices in Indianapolis (Southside), Greenwood and Bloomington, Indiana.
Sources
- IRS Topic No. 701, Sale of Your Home: https://www.irs.gov/taxtopics/tc701
- IRS Publication 523, Selling Your Home: https://www.irs.gov/publications/p523
- Indiana Code 6-3-1-3.5 (Indiana adjusted gross income) and 6-3-2-1 (adjusted gross income tax rate): https://iga.in.gov/laws/2025/ic/titles/6
- Indiana REALTORS Housing Hub, Johnson County, August 2026: https://data.indianarealtors.com/viewreport/2/all/18081/
