Do you own a home, an apartment, or another type of real estate property in the Keystone State? Local and state-level real estate legislation can affect closing costs if you do and plan to sell it. Learn which laws and rules Pennsylvania has implemented to tax you on the sale of a home, how these laws compare to other states, and how to report your sale.
Do You Pay Capital Gains Tax When Selling a Home in Pennsylvania?
According to the Pennsylvania Department of Revenue (PA-DoR), the state does not define capital gains or make any provisions specifically defining long-term or short-term capital gains. All gains realized from selling, exchanging, or disposing of any type of property are taxed according to the Pennsylvania Personal Income Tax (PA PIT) system, meaning they are taxed as personal income.
According to the PA-DoR’s Personal Income Tax portal, Pennsylvania’s personal income tax rate is a flat 3.07%. Capital gains realized from the sale of a home is one of the state’s eight defined income classes: “Net gains or income from the dispositions of property.”
The 4 Levels of Pennsylvania Taxes on Real Estate
Individuals looking to sell real estate property in Pennsylvania must pay taxes on four levels: federal capital gains taxes, state-level personal income taxes, state-level transfer taxes, and municipality transfer taxes.
Federal Capital Gains Taxes
Rate: Varies from 0% to 28%. The most common rate is 15%.
When selling real estate in Pennsylvania, you must pay federal capital gains tax. The IRS defines two types of capital gains: short-term and long-term. If you own the property for one year or less before selling, it is a short-term capital gain. If you’ve held it for over a year, it’s long-term.
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 the 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: Aaron is a single taxpayer earning $100,000 annually. He owned and lived in a single-family home in Allentown, PA, which he bought for $200,000, then used as a primary residence for five consecutive years before deciding to sell his property. When he sold it, the final sale price was $285,000, meaning Aaron realized $85,000 of capital gains. Due to the length of homeownership, the IRS categorizes these gains as long-term.
Typically, his filing status and taxable income would place him in the 15% tax bracket and require him to pay $12,750 in federal capital gains tax. However, IRC Paragraph 121 allows him to exclude up to $250,000 on the gains he realized from the tax because his property passes the ownership and use tests. The capital gains do not exceed the $250,000 threshold, allowing him to exclude 100% of his gains and sell his house without paying federal capital gains taxes.
Pennsylvania State Capital Gains Tax
Rate: 3.07%
Pennsylvania taxes capital gains as personal income. Due to the Keystone State levying a flat income tax rate of 3.07%, there is only one tax bracket.
How is the Pennsylvania state capital gains tax calculated?
The Pennsylvania Department of Revenue treats capital gains realized on the sale of a home as “net gains from the disposition of property,” subject to the state’s personal income taxation schedule.
Example: When Aaron sold his house and earned $85,000 of capital gains on the sale, the state considers him to have earned an additional $85,000 on top of his regular annual income of $100,000. Pennsylvania will therefore tax him as though he earned $185,000. At the state’s flat income tax rate of 3.07%, Aaron will pay $5,679.50 in state income taxes.
Pennsylvania State Transfer Taxes
Rate: 1% of the property’s value at the time of the sale.
In addition to capital gains being taxed as income, Pennsylvania levies a second tax called the Realty Transfer Tax (RTT) on real estate transfers.
According to PA-DoR, the Realty Transfer Tax applies to the transfer of any real estate property, whether by deed, instrument, long-term lease, or any other agreement, with few exceptions listed in the law.
The RTT is equal to 1% of the property’s value at the time of the sale.
Tax liability is shared between the person transferring the property (the grantor) and the person receiving the property (the grantee). While it is not a legal requirement in state law, it is common for both parties to split the taxes evenly.
How is the Pennsylvania state transfer tax calculated?
When selling a home in Pennsylvania, both the person selling the property and the new owner must pay the Realty Transfer Tax to the state. The most common arrangement is for both parties to split the costs evenly, meaning the grantor pays 50% of the RTT, whereas the grantee pays the remaining 50%.
Example: Aaron sold his Allentown, PA, house to Brianna, another Pennsylvania resident. Due to the property’s final sale price being $285,000, the Realty Tax Transfer owed to the state is $2,850. Aaron and Brianna agree to split the costs evenly, meaning Aaron pays $1,425 and Brianna pays the remaining $1,425 in state transfer taxes.
Pennsylvania Local Transfer Taxes
Rate: 1% in most counties
Besides the state of Pennsylvania, local governments in Pennsylvania also levy local-level Realty Transfer Taxes. These taxes are typically split between the local government and the corresponding school district.
For example, residents of Bellefonte, PA, selling real estate property in the town must pay RTTs to the Centre County government and the local school district, the Bellefonte Area School District.
Each county, township, municipality, and city borough can impose its own rates. The best way to determine your local government’s Realty Transfer Tax rates is to visit the county’s website and check the local RTT rate tables. The most common local RTT rate is 1% on the property’s final sale or transfer price, split evenly between the local municipality and the local school district.
As with state transfer taxes, both the grantor and the grantee are held jointly liable for payment of the tax. The most common arrangement is to split the taxes evenly.
How are Pennsylvania local transfer taxes calculated?
Local government entities in Pennsylvania calculate their local-level real estate transfer taxes according to the property’s final sale price, similar to the state government.
Example: Allentown, PA, is located in Lehigh County. According to the Lehigh County Recorder of Deeds website, the local government levies a combined local-level Realty Transfer Tax of 1%, including 0.5% to the Allentown municipality and 0.5% to the Allentown School District.
When Aaron transferred his Allentown home to Brianna for a purchase price of $285,000, the law required both to pay local-level Realty Transfer Taxes to Lehigh County. The total amount owed to the local government is $2,850. As with state taxes, Aaron and Brianna agree to split the costs evenly, meaning both parties pay $1,425 each in local transfer taxes.
Pennsylvania Exemptions and Deductions for Real Estate Taxes
There is no exemption for capital gains taxes in Pennsylvania because the state treats it as income. However, the Pennsylvania Department of Revenue exempts specific types of real estate transfers from the state-level Realty Transfer Tax (RTT).
Pennsylvania Transfer Tax Exemptions
Pennsylvania state law (61 PA Code 91.193) outlines a list of transactions exempt from the Realty Transfer Tax. Below are some of the most common exemptions.
1. Transactions from an Excluded Party to Another Excluded Party
Any real estate transaction where both grantor and grantee are excluded parties, as defined in 61 PA Code 91.192, is exempt from paying the state-level Realty Transfer Tax.
Excluded parties include the following:
- The Commonwealth of Pennsylvania and any of its subdivisions, agencies, and instrumentalities
- The federal government and any of its subdivisions, agencies, and instrumentalities
2. Special Transfers to the State or Federal Government
Transfers of real estate property to the federal or state government or any of its subdivisions, agencies, or instrumentalities may be exempt from the Realty Transfer Tax if the property is:
- Subject to a taking by eminent domain
- Gifted or donated for public use
- Under a deed of reconveyance following a condemnation
- Sold or seized for tax collection purposes
- Under mortgage foreclosure
3. Transfers Between Family Members
Per 61 PA Code 91.193(b)(6), transfers of real estate property are exempt from the Realty Transfer Tax if done between certain family members under specific conditions.
Eligible family members include:
- Husband and wife
- Direct descendants (children, grandchildren, etc.) and ascendants (parents, grandparents, great-grandparents, etc.)
- Siblings
- Direct ascendants of a child, unless the child is deceased
- Current spouse of a child
- Individuals and their siblings’ current spouse unless that sibling is deceased
- Previously married but currently divorced individuals if both spouses initially acquired the property jointly OR if either spouse acquired it before or during their marriage
4. Transfers to Estates Following a Death
If a property owner dies, the law exempts transfers from the RTT if there is no or nominal consideration (e.g., $1) and if the transfer is from the deceased owner’s representative to a designated heir or devisee.
The law applies to both testate successions, meaning a will is in place, and intestate ones, meaning no will existed at the time of death.
5. Transfers to and from Trustees
Pennsylvania law exempts real estate transfers from the Realty Transfer Tax if it comes from or goes to a trustee of an ordinary trust.
6. Corporate Transfers
Specific types of transfers of real estate property to and from corporate entities are exempt from the RTT:
- Transfers due to a statutory merger or a consolidation of any corporation
- Transfers due to the statutory division of a non-profit corporation
- Transfers following a corporation’s change of status to or from a non-profit corporation
7. Transfers to or from Religious Organizations
Transfers of real estate property involving religious organizations are exempt from the RTT if they meet both of the following conditions:
- Both the grantor and the grantee belong to a religious or apostolic organization recognized as an association, corporation, or non-profit possessing tax-exempt status under Section 501(c)(3) or 501(d) of the Internal Revenue Code.
- The grantor has not used the property for commercial purposes and is not of a type the law considers commonly used for commercial purposes.
8. Low-Value Transfers
If the total value of the interest in the real estate property at the time of the sale is $100 or less, Pennsylvania law exempts the transfer of such property from the RTT.
9. Deed Transfers to Burial Sites
Transfers of real estate property deeds to burial sites are exempt from paying the Realty Transfer Tax if the deed conveys a right to sepulcher or erect monuments without conveying the title to the land.
Pennsylvania Real Estate Taxes vs. Other States
Compared to other states, Pennsylvania’s combined real estate taxes, including capital gains and transfer taxes, are lower than the average, ranking among the lowest nationwide. Below is a breakdown of how real estate taxes in Pennsylvania compare to their equivalents in other states.
New York
When selling a home in the State of New York, any capital gains realized on the sale are treated as income, and any property transfer from one taxable party to another is taxed. The state makes no distinction between short-term or long-term capital gains, making it similar to Pennsylvania. Instead, the Empire State uses a multi-tiered system to calculate taxes owed.
Capital Gains Tax Rate: Taxed as income, 4%-10.9%
Because capital gains are treated as income, New York taxes sellers using its three-tiered system, which includes fixed tax tables, tax rate schedules, and tax computation calculators. While the exact amount of taxes owed depends on the seller’s taxable income and filing status, the rates in the New York State tax schedule tables range from 4% to 10.9%.
Transfer Tax Rate: 0.4% + 1% of the property’s sale price if over $1 million
New York state law uses two transfer taxes: a base rate calculated for all transfers and an additional tax that only applies to high-value properties known as the mansion tax. The base rate taxes $2 for every $500 or fraction thereof in the final consideration amount, making it approximately equivalent to 0.4%. The mansion tax is levied on top of the base rate and is 1% of the property’s final sale price.
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, 0.65%-1.15% 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.
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.
When Do You Pay Capital Gains Tax on Pennsylvania Real Estate?
Individuals who have realized capital gains must report them on their tax returns.
Short-Term vs. Long-Term Capital Gains Tax Rate in Pennsylvania
According to the Pennsylvania Department of Revenue (PA-DoR), the state does not make specific provisions for capital gains, including short-term or long-term gains. All capital gains, regardless of whether they are short-term or long-term, are taxed as income.
How to Avoid Capital Gains Taxes on Home Sale in Pennsylvania
If you plan to sell a home, you can take advantage of specific strategies to help you reduce or eliminate capital gains taxes and reduce your closing costs in Pennsylvania.
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: As a single taxpayer selling his primary residence in Pennsylvania, Aaron may be able to exclude up to $250,000 of capital gains from the sale of his home. To pass the use test and verify occupancy, he provided copies of his utility bills for the past two years, proving he’s lived at this address for the period required by the law.
The documents Aaron provided allow him to pass the ownership and use tests and exclude up to $250,000 of capital gains from federal capital gains taxes.
State-Level Exclusions
Pennsylvania law (61 PA Code 103.13(h)) allows certain individuals to exclude all gains realized on the sale of a home if the seller can prove they used the home as a primary residence and pass specific conditions. This exclusion allows the seller to avoid reporting capital gains as income and avoid state-level income taxes on the sale of a home in Pennsylvania.
Individuals selling a home in Pennsylvania qualify for this exclusion if all of the following conditions are met:
- The date of disposition, also known as the date of sale, must be after December 31, 1997. The seller must have sold the home at any date starting from January 1, 1998, or later.
- The home sold must be a primary residence and meet the state’s ownership and use tests. However, they are identical to the federal tests: two years of ownership and two years of use within the five years before the sale.
Additionally, one of the two conditions below must apply:
- The seller must not have used the state-level exclusion to exclude capital gains on another house in the last two years.
- The seller is disposing of the home due to an “extraordinary and unforeseeable circumstance.” The law provides examples, such as unplanned changes in employment, unforeseen changes in health conditions, significant financial hardship due to an accident, or loss of property due to a casualty.
Example: Aaron lived at his primary residence in Pennsylvania for over nine years before selling it. Because he passed the federal-level ownership and use tests, he also qualified for the state-level exclusions.
He did not own any other property at the time of the sale and did not use the state-level exclusion for another house, allowing him to benefit from the state-level exclusion. Consequently, Aaron does not pay any income taxes on the capital gains realized with the sale of his home.
How to Report Your Property Sale for Taxes in Pennsylvania
Reporting the sale of a property for taxes requires you to complete specific forms and documents, including both federal and state-level forms.
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.
Pennsylvania Department of Revenue Tax Forms
Due to the state of Pennsylvania treating capital gains as income, you will need to report gains made on the sale of a property on a personal income tax form.
When reporting as an individual, you’ll need to fill in and send a Form PA-40. To report gains realized on the sale of a property, you’ll need to fill in the fifth income category, titled “Net Gain or Loss from the Sale, Exchange, or Disposition of Property.” Enter the total amount of gains realized in Field 5. If you realized a loss that year, check the “LOSS” box, then enter the amount corresponding to your losses.
FAQs
Here are the answers to some common questions about capital gains taxes in Pennsylvania when selling a residence.
On July 8, 2022, Pennsylvania passed House Bill 1342, making the state Section 1031 compliant. If you’ve realized gains on the sale of a property in Pennsylvania on or after January 1, 2023, then reinvested them into a property of similar type under a qualifying Section 1031 like-kind exchange, you can defer payment of both federal and state-level capital gains taxes.
Yes. Land is a type of capital asset, making it taxable by the federal, state, and local governments. If you sold land in Pennsylvania and realized a capital gain on the sale, that gain is taxable.
No. The over-55 home sale exemption is an old federal law that allowed seniors over the age of 55 to avoid paying capital gains taxes on the sale of a home. This law was repealed in 1997 with the passage of the Taxpayer Relief Act of 1997. It introduced the current ruling allowing any homeowner to exclude up to $250,000 (or $500,000 if married and filing jointly) of the capital gains on the sale of a primary residence.
Capital gains can be taxed by both the federal government and state governments. Capital gains in Pennsylvania are taxed as income, meaning Pennsylvanians may pay both federal and state-level capital gains taxes after selling real estate.
No. Per the IRS, all capital gains realized are taxable and must be reported. However, you can deduct capital losses on business and investment property, such as rental property used as your primary income. You cannot, however, deduct losses on the sale or exchange of property used for personal purposes.
Yes. If you sell a home that is not used as a primary residence in Pennsylvania, you must pay capital gains taxes. Non-primary residences are ineligible for federal exclusion of long-term capital gains or state-level exclusions.
If you lose money on a home sale in Pennsylvania, you realize a capital loss. Pennsylvania law only recognizes capital losses on property traded for profit, which excludes homes intended for personal use.
If you plan to sell your primary residence, Pennsylvania law uses the same ownership and use test as the IRS to determine whether you qualify for a capital gains tax exclusion. To benefit from the state-level exclusion and avoid paying capital gains taxes on the sale, you must have owned the home for at least two years AND used it as your primary residence for at least two years within five years of the sale.
Pennsylvania law does not make any age-related provisions to avoid paying capital gains taxes.
