Selling Real Estate in 2026 Without a Tax Surprise: What I Look At Before Any Client Lists
Ending New York Residency While Operating a New York Professional Corporation
January 28, 2026January often feels like a quiet month when it comes to taxes. The holidays are over, April feels far away, and many people assume there’s plenty of time to deal with tax matters later. After working with U.S. taxpayers—particularly professionals, business owners, and Americans living or working abroad—I can say with certainty that this assumption leads to some of the most expensive tax mistakes I see each year.
I’ve watched the same moment play out more times than I can count: a seller calls me excited about the number they’re about to get for a property, and then they lower their voice and ask, “Am I about to owe a massive tax bill?”
One client in particular still stands out. They were ready to list, confident they were “fine on taxes,” and one small assumption could have turned a great sale into an expensive surprise. Nothing shady—just a misunderstanding of how the IRS measures capital gain, what counts as your main home, and when the rules change because the property was rented, held for investment, or located abroad.
When I advise someone selling in 2026, I don’t start with the sale price. I start with the IRS framework that determines whether the gain is excluded, how the gain is calculated, and what kind of reporting gets triggered. The good news is that the rules are well-established and, when you plan early, you can often keep more of what you’ve earned while staying fully compliant.
The rule that saves many homeowners: the Section 121 home-sale exclusion
A large portion of tax anxiety disappears when a seller learns that not all gain on a home sale is automatically taxable. If the property you’re selling is your main home, IRS guidance explains that you may be able to exclude up to $250,000 of capital gain from income ($500,000 for many married couples filing jointly) if you meet the requirements. The IRS lays this out in Publication 523 (Selling Your Home) and in Topic No. 701 (Sale of your home).
In real life, that exclusion can mean the difference between a “celebration closing” and an unexpected five-figure tax bill. But the exclusion is not automatic, and the sellers who get blindsided are usually the ones who assume they qualify without checking the facts that the IRS actually tests.
Timing matters more than most people realize: the 2-out-of-5-year tests
The part people miss isn’t the dollar amount—it’s the timeline. The IRS explains that, to qualify, you generally must meet both an ownership test and a use test during the 5-year period ending on the date of sale. In plain terms, you typically need to have owned the home for at least two years and lived in it as your main home for at least two years.
Where sellers get into trouble is when life changes the story: moving out early, renting the home for a period, extended travel, job relocations, or selling sooner than expected. The IRS does recognize that certain circumstances can allow a reduced exclusion (for example, specific employment, health, or unforeseen events), but that’s a facts-and-documentation conversation—not something I like to “assume” on behalf of a client.
The real gain isn’t “sale price minus purchase price”
Once we know whether the sale is likely to be treated as a main-home sale, the next question becomes: what is the gain, really?
I routinely see sellers underestimate how much legitimate documentation can change the number. The IRS focuses on two moving parts: the amount realized and your adjusted basis. In its home-sale FAQs, the IRS explains that the amount realized generally includes cash or other property you receive plus certain debts the buyer assumes or that are paid off as part of the sale, minus selling expenses. It also explains that your adjusted basis is generally what it cost you to acquire the home plus capital improvements, reduced by certain decreases.
That’s why “small” items like improvement records become big in the tax result. A well-documented set of capital improvements can materially increase basis and reduce the taxable gain. If someone tells me they remodeled a kitchen, added a roof, upgraded HVAC, or did major structural work and they have invoices, permits, and proof of payment, I treat that as part of the tax strategy—not administrative clutter.
Reporting can be triggered even when tax is minimized
Even if a client expects to exclude all gain, I still watch the reporting rules closely. The IRS notes situations where you may need to report the sale of your main home on Form 8949 (for example, if you have gain and don’t qualify to exclude all of it, if you choose not to exclude it, or if you received Form 1099-S).
This is an area where sellers sometimes get confused: “I’m not paying tax, so I don’t have to report.” That isn’t always the right conclusion. Clean reporting reduces audit friction and prevents avoidable IRS notices.
When it’s an investment property, the conversation changes—fast
If the property is not your primary residence—think rental property, land held for appreciation, or business real estate—the Section 121 home-sale exclusion is usually not the tool. At that point, the seller is often facing capital gains tax plus other layers that can show up depending on the fact pattern.
One concept I flag early is that depreciation history can change outcomes even if the property feels like “just real estate.” IRS guidance on home-sale basis and related FAQs remind taxpayers that depreciation allowable can reduce basis and affect how gain is taxed, and it also points out that taxable gain can potentially be subject to the 3.8% Net Investment Income Tax depending on the taxpayer’s overall situation.
That’s why I prefer to analyze investment property sales before a listing agreement is signed. Once a closing date is set, options narrow.
The 1031 exchange is powerful—but it’s a deadline-driven machine
When a client is selling business or investment real property and wants to reinvest, the word that comes up is “1031.” The IRS explains that like-kind exchanges under IRC Section 1031 allow taxpayers to postpone paying tax on gain when proceeds are reinvested in qualifying like-kind property—tax-deferred, not tax-free.
The most common failure I see isn’t eligibility—it’s timing. IRS instructions for Form 8824 spell out the key deadlines in a deferred exchange: replacement property must generally be identified in writing within 45 days of transferring the relinquished property, and received by the earlier of 180 days after the transfer or the due date (including extensions) of the tax return for the year of transfer.
That’s why I treat 1031 planning like an engineering project. If the calendar isn’t managed, the tax deferral can collapse.
Selling property abroad still matters to the IRS—and planning can prevent double taxation
Another seller profile I see often is the U.S. taxpayer selling property outside the United States. Many are shocked to learn that the IRS still cares.
The IRS is direct on this point: federal law generally requires U.S. citizens and resident aliens to report worldwide income, and the IRS provides specific guidance on reporting when living abroad.
If foreign tax is paid, that doesn’t automatically eliminate U.S. tax—but it can change the result significantly. The IRS explains that taxpayers can generally choose to take qualified foreign taxes as a foreign tax credit or as an itemized deduction in a given year, and it provides dedicated guidance on making that choice. The IRS also notes that individuals typically use Form 1116 to claim the foreign tax credit, with detailed rules and limitations in the instructions.
In practice, I’ve seen international sellers save real money simply by coordinating timing, documenting the nature of the foreign tax paid, and aligning the U.S. reporting position with what was actually taxed abroad. The strategy isn’t “avoid tax.” It’s prevent paying the same tax twice because the planning was done too late.
What I want every 2026 seller to understand before listing
When a client talks to me early—before listing, before signing a contract, before choosing an exchange facilitator or deciding how to report foreign taxes—planning options are wide. When a client calls me after closing with a “quick question,” the IRS rules don’t bend just because the paperwork is already signed.
If you’re selling in 2026, I’d rather you know the rules now than pay for them later. The IRS has given homeowners and investors real opportunities—Section 121 for a main home, 1031 for investment property in qualifying situations, and foreign tax credit tools for international coordination—but each of those benefits is conditional and documentation-driven.
Important Notice
This article is intended for general informational purposes only. It describes a representative fact pattern and planning approach based on a real world situation, but details have been simplified and anonymized. Nothing in this article is intended to constitute legal, tax, or accounting advice, nor should it be relied upon as such. Tax residency, entity structuring, compensation design, and international tax outcomes depend heavily on individual facts and circumstances. Readers should consult with their own professional advisors before taking any action based on the information discussed here.
