If you own a single-family home, an apartment, or another type of residential property in the Tar Heel State, it is vital to understand how the real estate taxation system works. Learn about local and state-level taxes and exemptions in North Carolina and how they affect your profits after selling your home.
Do You Pay Capital Gains Tax When Selling a Home in North Carolina?
Although home sales can be excluded from federal capital gains tax if they meet certain criteria, the North Carolina Department of Revenue (NCDOR) treats any gross income earned by North Carolina residents received “in the form of money, goods, property, and services” as individual income.
If a North Carolina taxpayer earns more than the tax year’s minimum federal gross income threshold, they must file a tax return. For example, single taxpayers were required to file an NC tax return for Tax Year 2022 if their federal gross income exceeded $12,750.
The 4 Levels of North Carolina Taxes on Real Estate
If you own a home or real estate assets in North Carolina, selling your property requires you to pay taxes on three primary levels: Federal capital gains taxes, state income taxes, and state transfer taxes. A fourth level, county transfer taxes, applies to taxpayers selling real estate in one of six specific North Carolina counties.
Federal Capital Gains Taxes
Rate: Varies from 0% to 20%, depending on the taxpayer’s situation. The most common rate is 15%.
You must pay federal capital gains tax when selling property in North Carolina. The IRS defines two types of capital gains: short-term and long-term. It is considered a short-term capital gain if you have owned the property for one year or less before selling it. If you’ve held it for over a year, it is a long-term capital gain instead.
Short-term capital gains are taxed as ordinary income, meaning the tax brackets for this type of gain are identical to those for standard federal income taxes.
Long-term capital gains tax brackets are calculated based on the seller’s filing status and income levels:
- 0% for taxpayers meeting the following conditions:
- The taxpayer’s filing status is “Single” or “Married Filing Separately” and their taxable income of $41,675 or less
- The taxpayer’s filing status is “Married Filing Jointly” or “Qualifying Surviving Spouse,” and their taxable income of $83,350 or less
- The taxpayer’s filing status is “Head of Household” and their taxable income of $55,800 or less
- 15% for taxpayers meeting the following conditions:
- The taxpayer’s filing status is “Single,” and their taxable income is over $41,675 but $459,750 or less
- The taxpayer’s filing status is “Married Filing Jointly” or “Qualifying Surviving Spouse,” and their taxable income is over $83,350 but $517,200 or less
- The taxpayer’s filing status is “Married Filing Separately,” and their taxable income is over $41,675 but $258,600 or less
- The taxpayer’s filing status is “Head of Household,” and their taxable income is over $55,800 but $488,500 or less
- 20% for taxpayers exceeding the maximum thresholds outlined for each respective filing status in the 15% category (e.g., taxpayer filing as single and earning over $459,750)
Paragraph 121 of the Internal Revenue Code (IRC) outlines exceptions to long-term capital gains taxes. Sellers can exclude up to $250,000 (or $500,000 for married couples filing jointly) on the gains realized following the sale of their home if they pass the “ownership and use tests.” You qualify for this exclusion if:
- The house sold was your primary residence
- You owned the home for two years or more
- You lived in the home and used it as your primary address for two years or more
How is the Federal Capital Gains Tax Calculated?
According to the National Association of Realtors, the median period of homeownership in the United States is 13 years. While the exact duration varies by area, it typically falls between 6 and 21 years. These stats show that most individuals selling a home in the United States will pay long-term federal capital gains taxes.
Example: Barbara is a married taxpayer filing separately, with an annual income of $350,000. She owned an apartment in Manteo, NC, for six years before selling the property. She and her husband have used the property as her primary residence for six years.
Barbara initially purchased the apartment for $200,000. When she sold it, the final consideration amount was $302,000, resulting in $102,000 in capital gains. Barbara’s total period of homeownership exceeds one year, making her capital gains long-term.
Due to her filing status and taxable income, she would normally be in the 20% tax bracket and have to pay $20,400 in federal capital gains taxes on the sale of the apartment. However, Barbara meets the IRS’s ownership and use tests because she owned and used the apartment as her primary residence for over two years. Consequently, IRC Paragraph 121 allows her to exclude up to $250,000 on capital gains realized from the tax. Because the gains she realized do not exceed that threshold, Barbara can exclude the entirety of her capital gains and sell her apartment without paying any federal capital gains taxes.
North Carolina State Capital Gains Tax
Rate: 4.75% for Tax Year 2023, 4.99% for Tax Year 2022
North Carolina taxes income realized from all sources as individual income, including capital gains. According to the NCDOR, the state taxes individual income at a flat rate that typically varies every 1 to 3 years. For Tax Year 2022, the individual income tax rate was 4.99%. The state lowered it to 4.75% for Tax Year 2023.
How is the North Carolina State Capital Gains Tax Calculated?
The North Carolina Department of Revenue taxes most gross income as individual income provided the taxpayer has received it in the form of non-exempt money, goods, property, or services. Capital gains are a form of income, subject to the state’s flat income tax schedule.
Example: When Barbara sold her Manteo, NC, apartment and earned $102,000 of capital gains on the sale, the state’s taxation system considered the gains additional income. Under typical circumstances and at the state’s flat tax rate of 4.75% for Tax Year 2023, Barbara’s standard annual income of $350,000 means she would pay $16,625 of state income taxes for Tax Year 2023.
However, selling the apartment added another $102,000 to her income, meaning she pays state individual income taxes as if she earned $452,000 instead. Consequently, Barbara will pay $21,470 in state income taxes.
North Carolina State Transfer Taxes
Rate: 0.2%
According to North Carolina legislation (NC General Statutes 105.228.28, 29, and 30), the state levies a transfer tax called the Excise Tax on Conveyances. This tax is levied on any transfer of real estate properties located in North Carolina from one person to another, excluding governmental units or their instrumentalities.
The Excise Tax rate is $1 for every $500 or fractional part thereof in the transferred property’s final consideration amount, equal to about 0.2%.
How is the North Carolina State Transfer Tax Calculated?
When selling a North Carolina property to another person or entity, such as a home or an apartment, the state will charge $1 per $500 on the final sale price. This tax is typically levied on the seller. However, both parties may agree to split payment of the tax.
Example: Barbara sold her apartment located in Manteo, NC, to Carol. The final sale price negotiated between both parties for the apartment was $302,000. Upon completing the transfer, the state levies $1 for every $500 in the conveyance, or $604. As the seller, Barbara is responsible for paying this tax.
North Carolina County Land Transfer Tax
Rate: 1% if in one of the six applicable counties
In addition to the state transfer taxes and personal income tax, six counties in North Carolina impose an additional local transfer tax on the transfer of property called the Land Transfer Tax.
Below is the list of counties levying the Land Transfer Tax alongside the tax rates for each county:
- Camden County: 1% of the selling price
- Chowan County: 1% of the selling price
- Currituck County: $1 per $100 in the conveyance (1%)
- Dare County: $1 per $100 in the conveyance (1%)
- Pasquotank County: $1 per $100 in the conveyance (1%)
- Perquimans County: 1 per $100 in the conveyance (1%)
A seventh county, Washington County, is authorized by the state to levy the Land Transfer Tax but does not currently impose it.
How is the North Carolina County Land Transfer Tax Calculated?
When selling a property located in the counties levying the North Carolina Land Transfer Tax, the county taxes the transfer at a rate of $1 per $100, or 1% of the final purchase price. Like the state-level Excise Tax on Conveyances, the Land Transfer Tax is typically the seller’s responsibility. However, the seller and buyer may negotiate to split the payment of the tax.
Example: Barbara’s property is located in Manteo, NC. The town is part of Dare County, which imposes the local-level Land Transfer Tax. In addition to the state transfer tax, Barbara owes a county-level transfer tax on the sale of her apartment for $302,000.
Upon completing the transfer, the county levies $1 for every $100 in the conveyance, or $3,020. As the seller, Barbara is responsible for paying this tax, meaning she must pay a total of $3,624 in combined state and local transfer taxes.
North Carolina Exemptions and Deductions for Real Estate Taxes
Although most North Carolina residents are subjected to real estate taxes when selling a home, specific exceptions may apply depending on the circumstances surrounding the sale.
North Carolina Capital Gains Exemptions
North Carolina taxes capital gains as income. The tax applies under all circumstances, meaning there are no exemptions to taxes on capital gains realized in North Carolina.
North Carolina Transfer Tax Exemptions
According to the North Carolina General Statutes, the law outlines nine exemptions to the Excise Tax on Conveyances:
1. Transfers of Real Estate to Government Entities
If a person or entity sells or transfers real estate to a governmental unit or an instrumentality of a governmental unit, the Excise Tax on Conveyances does not apply (NC Gen Stat 105-228.28).
2. Transfers By Operation of Law
One of the eight exemptions to the Excise Tax on Conveyances listed in law (NC Gen Stat 105-228.29) is transfers of real property by operation of law. The most common examples are property transfers due to a will, an estate, or specific types of real estate contracts.
3. Lease Transfers
Properties transferred due to a leasehold estate are exempt from the North Carolina Excise Tax on Conveyances if the lease is for a term of years, meaning it has a defined start and end date.
4. Transfers According to a Will
If a property owner has written a valid will with proper instructions and beneficiaries to transfer their property to, North Carolina law excludes such transfers from the Excise Tax on Conveyances.
5. Intestate Transfers
If a given property’s owner dies without a valid will and instructions regarding who to transfer their property to, the property falls into a state of intestacy. The state’s probate court typically handles transfers of intestate property, and such transfers are not subject to the Excise Tax on Conveyances.
6. Gifting of Property
Gifting the deed to a property is a type of transfer where one party (the donor) transfers the property to another (the donee) with no consideration in return. Gift transfers are not subject to the Excise Tax on Conveyances.
7. Transfers Not Paid in Money or Property
If a property transfer does not require the transferee to pay consideration in money or property to the transferor, it is legally exempt from the Excise Tax on Conveyances. This exemption is distinct from gifts, as some transfers may involve consideration paid in something other than money or property, whereas gifts are exclusively for transfers without consideration.
8. Transfers Due to Mergers, Conversions, and Consolidations
Specific business and corporate property transfers may occur following a merger, conversion, or consolidation of business entities. Such transfers are exempt from the Excise Tax on Conveyances.
9. Transfers to Secure Debt
Per the law, a property transfer to an instrument securing indebtedness, such as an entity repossessing a home to repay a debt, is exempt from the Excise Tax on Conveyances.
North Carolina Real Estate Taxes vs. Other States
Although up to four taxation layers apply to real estate sales and transfers in North Carolina, the state’s flat income tax rates place it near the average compared to the rest of the nation. Below is a breakdown of how North Carolina’s real estate taxes compare to equivalent tax schedules in other states.
Illinois
While Illinois tax legislation imposes both capital gains and transfer taxes, the combined tax rates are close to the national average.
Capital Gains Tax Rate: 4.95%
According to Illinois tax legislation (35 ILCS 5/201), capital gains realized in the state are taxed as income. An individual selling a property in Illinois will therefore be at the state’s flat rate of 4.95%.
Transfer Tax Rate: 1% levied by the state + 0.50% levied by the county + variable municipal taxes
Illinois taxes property transfers on multiple layers: state-level, county-level, and municipal-level. According to Illinois law (35 ILCS 200/31-10), state-level transfer tax is $0.50 per $500, or about 1%, whereas the county-level transfer tax is $0.25 per $500, equivalent to 0.5%. Municipal-level transfer taxes vary from locality to locality: some impose no taxes, some impose flat fees, and others impose tax rates that may reach up to $10 per $1,000 (1%) or more.
Georgia
Residents of the Peach State can expect to pay similar taxes on real estate transfers to the national average.
Capital Gains Tax Rate: Approximately 1% to 5.75%
Georgia taxes capital gains as income, subjecting them to the state’s six tax brackets. The amount owed depends on the taxpayer’s filing status and taxable income in the state.
For example, a single taxpayer earning $100,000 of Georgia Taxable Income and realizing a capital gain of $35,000 will be taxed as though they earned $135,000 for the tax year. Per the Georgia Tax Rate Schedule, they must pay $230 plus 5.75% of the amount over $7,000, or $128,000. Because 5.75% of $128,000 is $7,360, that taxpayer would owe $230 + $7,360, or $7,590 in state income taxes.
Transfer Tax Rate: 0.1% ($1 for the first $1,000 + $0.10 for each additional $100)
According to the Georgia Department of Revenue (GA-DoR), real property transfers in the state are taxed at a rate of $1 for the first $1,000 plus 10 cents for every additional $100 or fraction thereof in the final conveyance amount. This transfer tax schedule effectively corresponds to an effective tax rate of 0.1%.
Florida
Florida is one of the less expensive states for real estate investments due to its relatively lax real estate taxation system.
Capital Gains Tax Rate: 0%
Per the Florida Department of Revenue, the Sunshine State does not levy an individual income tax or any type of tax on capital gains.
Transfer Tax Rate: 0.70% in most counties, 0.60%-1.05% in Miami-Dade County
Florida levies a transfer tax called the Documentary Stamp Tax, levied at the county level. This tax is 70 cents per $100 or fraction thereof in the property’s final consideration amount, equivalent to about 0.70%.
An exception applies to Miami-Dade County, which levies 60 cents per $100 plus a surtax of 45 cents per $100 for any property that isn’t a single-family dwelling.
When Do You Pay Capital Gains Tax on North Carolina Real Estate?
You must pay capital gains taxes on the sale of North Carolina real estate if you cannot use the $250,000 gains exemption for a primary residence ($500,000 for married couples), the sale price exceeds the exception, and/or you are not using a 1031 exchange.
Due to the state taxing capital gains as income, individuals who have realized capital gains in North Carolina will report their taxable income yearly on their state tax returns with NCDOR Form D-400. According to the NCDOR, tax payment in North Carolina is due on March 15 of each year.
Short-Term vs. Long-Term Capital Gains Tax Rate in North Carolina
North Carolina does not differentiate between short-term and long-term capital gains. The state taxes both types of capital gains as income.
How To Avoid Capital Gains Taxes on Home Sale in North Carolina
Taxpayers in North Carolina looking to sell a home and reduce or eliminate the capital gains taxes they owe can use the following strategies to help reduce their closing costs:
Strategy #1: Federal Exclusion of Long-Term Capital Gains
According to the IRS, you can exclude up to $250,000 (or $500,000 if married and filing jointly) of the gains realized from the sale of a home, provided the home was your primary residence. You can prove your home was a primary residence by passing the ownership and use tests, which require you to pass the following:
- Ownership test: You have owned the home for at least two years before the sale. Documents such as a deed and title insurance may constitute valid proofs of ownership.
- Use test: You must show proof of occupancy, meaning you have lived in the home and used it as your primary residence for at least two years before the sale. Documents used to prove occupancy are outlined in federal proof of occupancy guidelines.
Although it is not required for the ownership and usage periods to be consecutive, you must be able to prove both ownership and use of the home within five years of the sale. Additionally, you must not have used this exclusion for another home in the last two years.
Example: Chris is a married taxpayer filing jointly with his wife, Danielle. The couple lives in a home located in Raleigh, NC, which they acquired for $400,000. After eight years of owning and using the home as their primary residence, they sell it for $710,000, realizing a long-term capital gain of $310,000.
As married taxpayers filing jointly, Chris and Danielle can use the federal exclusion to exclude up to $500,000 of capital gains realized on the sale of their home. The couple submits valid documentation to the IRS proving he meets the ownership and use tests. Because they realized less than the $500,000 threshold for their filing status, the couple can exclude 100% of the amount they realized from federal capital gains taxes.
How to Report Your Property Sale for Taxes in North Carolina
Individuals selling a home in the Tar Heel State must submit the proper paperwork to report the sale.
IRS Forms
To report the sale of your home to the IRS, you must submit two forms: IRS Schedule D (Form 1040) and IRS Form 8949.
Form 8949 requires you to report whether your gains are long-term or short-term. Short-term gains must be listed under Part I, whereas long-term gains must be listed in Part II. If you can exclude the gains you’ve realized with a specific property, enter the letter code “H” in column (f) on the line corresponding to that property, then write the corresponding adjustment amount in parentheses and as a negative in column (g).
After completing Form 8949, enter the corresponding information regarding short-term and long-term gains in IRS Schedule D (Form 1040). Part I lets you enter short-term gains, whereas Part II is for long-term gains.
North Carolina Department of Revenue Tax Forms
Taxpayers in the state must report capital gains on the state’s personal income tax form, NCDOR Form D-400. The form does not feature fields specifically for reporting capital gains or income from property sales, requiring the taxpayer to calculate their capital gains into their taxable income.
FAQs
Here are the answers to some common questions about capital gains taxes in North Carolina when selling a residence.
North Carolina’s real estate legislation is compliant with IRC Section 1031. If a real estate investor sells a property in North Carolina, realizes capital gains on the sale, then reinvests the gains into a property of similar type under a qualifying Section 1031 like-kind exchange, they may defer the payment of both federal and state-level capital gains taxes.
Yes. Land is a capital asset like real estate property. Realizing a capital gain on the sale of land in North Carolina subjects you to all applicable taxes.
No. In the past, federal legislation allowed senior citizens over the age of 55 to avoid paying capital gains taxes on a home sale. With the passage of the Taxpayer Relief Act of 1997, the federal government repealed the “over-55” home sale exemption. It was replaced by the current legislation, which allows homeowners to exclude up to $250,000 (or $500,000 for married taxpayers filing jointly) of the capital gains realized on the sale of a primary residence.
Capital gains taxes can be levied by both federal and state entities. In North Carolina, capital gains are taxed as income. When you sell a home and realize a capital gain, you must pay federal capital gains taxes, then count the capital gains as income on your state tax return.
It varies depending on the entities collecting taxes. At the federal level, capital gains are added to your Adjusted Gross Income (AGI) after reporting the sale using IRS Schedule D (Form 1040). In North Carolina capital gains are treated as income, so the state government collects taxes on capital gains yearly alongside other income taxes.
No. According to the IRS, all capital gains are taxable. However, specific types of capital losses are deductible, such as losses realized on business and investment property. You cannot deduct losses realized on personal-use property.
Yes. All capital gains realized in North Carolina are treated by the state as income, whether the property you sold was your primary or secondary residence. Additionally, secondary homes are ineligible for federal long-term capital gain exclusion.
If you sold a home and earned less than you paid for it, you realized a capital loss. While capital losses aren’t subject to capital gains taxes, they can be deducted. Federal law only allows you to deduct capital losses on a home sale if you used the property for business or investment purposes. Deductions do not apply to personal-use homes.
At the federal level, you can exclude up to $250,000 (or $500,000 if married and filing jointly) of the capital gains realized from federal capital gains taxes if you’ve owned and used the home as your primary residence for at least two years. However, there is no state-level equivalent; you cannot avoid paying state taxes on capital gains because they are taxed as income.
North Carolina legislation does not have any capital gains tax exclusions or exemptions for senior citizens. All North Carolina residents, regardless of age, must pay state income taxes on capital gains.
