Selling a home in Memphis comes with many considerations, but one of the most important is taxes. Whether you’re selling a primary residence or an investment property, knowing how taxes apply to your home sale can help you avoid surprises.
In this guide, we’ll cover the basics of capital gains taxes, the tax exemptions available for homeowners in Memphis, and how investors can navigate taxes — including 1031 exchanges for deferring capital gains tax.
What Are Capital Gains Taxes?
When you sell a home, the profit you make may be subject to capital gains tax. This is the difference between your sale price and your adjusted cost basis (your original purchase price plus improvements).
Example:
If you purchased a home for $180,000 and sold it for $250,000, your capital gain is:
$250,000 (sale price) – $180,000 (purchase price) = $70,000 gain.
However, capital gains tax doesn’t apply to the entire gain. You’re allowed to subtract certain expenses, like commissions and home improvements, before calculating the taxable gain.
Capital Gains Tax: The Basics for Memphis Homeowners
In Memphis, the capital gains tax is set at federal rates (as Tennessee does not impose a state income tax). The IRS distinguishes between short-term and long-term capital gains:
- Short-Term Capital Gains: If you own the home for less than one year, the gain is taxed as ordinary income, meaning it’s taxed at your regular income tax rate (up to 37%).
- Long-Term Capital Gains: If you own the home for more than one year, your gain is taxed at a lower rate, which is typically 15% or 20% for most taxpayers, depending on your income level.
| Income Level (2025) | Capital Gains Tax Rate |
|---|---|
| Up to $44,625 (single) | 0% |
| $44,626–$492,300 (single) | 15% |
| Over $492,300 (single) | 20% |
Note: You may qualify for 0% capital gains tax if your total taxable income (including the gain) is below a certain threshold.
Tax Exemptions for Homeowners in Memphis
If the home you’re selling is your primary residence, you may be able to exclude up to $250,000 of your capital gain from taxes ($500,000 for married couples filing jointly).
To qualify for this capital gains tax exclusion, you must meet these conditions:
- Ownership Test: You must have owned the home for at least two out of the last five years.
- Use Test: The home must have been your primary residence for at least two out of the last five years.
Example:
If you sell your home for $250,000 and have a gain of $90,000, you wouldn’t owe any taxes on the gain, as it falls under the $250,000 exclusion limit.
However, if the gain exceeds the exemption, the remaining gain is subject to capital gains tax.
Tennessee-Specific Real Estate Tax Considerations
Tennessee has a very favorable tax environment for home sellers, as the state does not have a capital gains tax or a state income tax. This is an advantage for homeowners selling in Memphis compared to states with higher income and capital gains taxes.
However, there are still closing costs, like county transfer taxes, that you should consider:
- Transfer Taxes: Memphis has a $0.37 per $100 transfer tax (calculated on the sale price). So, for a $200,000 home sale, this tax would be around $740.
While Tennessee’s lack of state income tax is a major advantage, it’s important to factor in these local transaction costs when calculating your net proceeds.
1031 Exchange Basics for Investors
For real estate investors, one powerful strategy to defer taxes is the 1031 exchange, which allows you to defer capital gains tax on investment property sales as long as the proceeds are used to purchase another similar property.
How a 1031 Exchange Works:
- Sell your investment property: The capital gains tax is deferred, not forgiven.
- Identify replacement property: You must identify potential replacement properties within 45 days of the sale.
- Buy the replacement property: You must close on the new property within 180 days of selling your original property.
- Use a Qualified Intermediary: You cannot take the sale proceeds into your own hands; instead, a third party (called a qualified intermediary) handles the funds.
1031 Exchange Example
Let’s say an investor in Memphis sells a rental property for $300,000, which they bought for $200,000. The gain of $100,000 would normally be taxed, but using a 1031 exchange, the investor can use that $100,000 gain to purchase another property, deferring taxes until the new property is sold.
When a 1031 Exchange Isn’t an Option
There are some circumstances where a 1031 exchange won’t work:
- Personal Residences: The 1031 exchange is only applicable to investment properties, not homes you live in.
- Short-term Ownership: Properties held for less than one year may not qualify.
- Boot: If you receive “boot” (cash or other assets) in a transaction, that portion of the gain is taxable.
Also, remember that you can only use a 1031 exchange for properties that are similar. The IRS defines this as properties that are both in the same “like-kind” category (i.e., real estate for real estate).
FAQs About Taxes on Selling Homes in Memphis
Q1: Do I pay taxes on the full sale price?
No, capital gains tax is only paid on the profit (capital gain) you make from the sale, not the entire sale price.
Q2: Can I sell a home without paying capital gains tax?
Yes, if you meet the requirements for the capital gains exclusion (own and live in the home for 2 of the last 5 years).
Q3: Does Tennessee have a state income tax?
No, Tennessee does not have a state income tax, making it a tax-friendly state for real estate transactions.
Q4: Can I use a 1031 exchange on a primary residence?
No, 1031 exchanges apply only to investment properties, not properties you use as a primary residence.
Q5: How do I report the sale of my home to the IRS?
You must report the sale if you have capital gains that exceed the exclusion limit or if you’re an investor. Most real estate transactions will require a Form 8949 and Schedule D on your tax return.
Final Thoughts
Understanding tax rules when selling a home in Memphis is critical to making informed decisions about your sale. Whether you’re a homeowner looking to take advantage of the capital gains exemption or an investor planning a 1031 exchange, knowing the ins and outs of taxes on home sales can save you money.
By following the proper steps, you can minimize your tax burden and keep more of your sale proceeds. If you’re working with cash buyers in Memphis or considering 1031 exchanges, it’s always a good idea to consult a tax professional to ensure you understand all the available options.
Author Bio
Written by Sarah Thompson, Lead Acquisition Specialist at Your Neighborhood Home Buyers. With 15+ years of experience in Memphis real estate, Sarah helps homeowners navigate the complexities of taxes, capital gains, and investment strategies. Learn more about our team.