Do You Have to Pay Capital Gains Tax When Selling Your House in Kentucky?
Most homeowners in Berea and Madison County don’t owe capital gains tax when they sell — because of the federal primary residence exclusion, up to $250,000 in profit ($500,000 for married couples) is completely tax-free if you’ve owned and lived in the home for at least two of the last five years. For taxable gains above that threshold, Kentucky applies a flat 3.5% state income tax in 2026 (down from 4.0% in 2025), plus applicable federal capital gains tax. What most sellers miss is that the right deductions — capital improvements, selling expenses, and commissions — can dramatically reduce or eliminate any taxable gain that would otherwise exceed the exclusion.
By Devin Todd Azbill, REALTOR® | May 30, 2026
Capital gains tax is one of those topics that comes up constantly when I’m working with sellers in Berea and Madison County — usually in the form of a slightly nervous question right before we review the net sheet.
“Wait, do I have to pay taxes on this?” And honestly? For most of my clients, the answer is no. But the rules matter, and understanding them before you list can be the difference between a clean sale and an unexpected tax bill.
Here’s what every Berea-area seller should know heading into 2026.
First, What Exactly Is a Capital Gain on a Home Sale?
A capital gain is the profit from the sale — but it’s not calculated the way most people expect. It’s not simply “what I sold for minus what I paid.”
The actual formula is:
Capital Gain = Sale Price − Adjusted Cost Basis − Selling Expenses
Your adjusted cost basis is your original purchase price plus the cost of any capital improvements you made during your ownership. If you bought your home in Berea for $220,000 and added a new kitchen for $35,000 and a new HVAC system for $8,000, your adjusted basis isn’t $220,000 — it’s $263,000.
Your selling expenses include your real estate commission, any pre-listing repairs agreed to in the contract, staging costs, legal fees, and transfer taxes. These costs are deducted from your gain, not your sale price — but the effect is the same: they reduce the number you ultimately pay tax on.
In practice, most sellers with long ownership histories — especially those who’ve made improvements along the way — find that their actual taxable gain is much lower than the difference between their purchase price and sale price suggests.
The Primary Residence Exclusion: Your Most Powerful Tool
Here’s the rule that eliminates capital gains tax for most Berea homeowners:
Under federal law, you can exclude up to $250,000 of capital gains from your taxable income if you’re a single filer — or up to $500,000 if you’re married and filing jointly — as long as you meet the ownership and use test.
To qualify, you must have:
- Owned the home for at least two years out of the last five
- Lived in it as your primary residence for at least two of the last five years
- Not used this exclusion on another home sale in the past two years
The two years don’t have to be consecutive — they just have to add up to 24 months within a five-year window. And Kentucky follows the federal exclusion at the state level: the excluded amount isn’t taxed by the state, either.
Let’s put that in real terms for the Berea market. Say you bought a home in Walker Branch Estates for $265,000 six years ago and you’re selling it today for $340,000. After adding $28,000 in capital improvements and subtracting $22,000 in selling expenses, your adjusted gain is roughly $25,000 — well under the $250,000 exclusion. You owe nothing.
Even if you made a bigger gain — say, $190,000 — you’d still be under the exclusion threshold if you’re filing as a single person. No federal, no state. That’s the power of the exclusion.
When the Exclusion Doesn’t Fully Cover Your Gain
If your gain exceeds the exclusion amount (or if you don’t qualify for the full exclusion), the excess is taxable. Here’s how it breaks down:
Federal capital gains tax: If you’ve owned the home for more than one year, the gain is taxed at long-term capital gains rates — 0%, 15%, or 20% depending on your total income. Most middle-income sellers in Berea fall into the 15% bracket.
Kentucky state tax: In 2026, Kentucky taxes all capital gains as ordinary income at a flat rate of 3.5%. This is actually good news — the rate dropped from 4.0% in 2025 as part of the state’s gradual income tax reduction plan. There’s no distinction between short-term and long-term gains at the state level.
So if your taxable gain — after the exclusion — is $80,000, you’d potentially owe roughly $12,000–$16,000 in combined federal and state taxes on that amount, depending on your income bracket. That’s a real number worth planning around before you close.
One thing worth noting for anyone selling an investment property or rental in Madison County: the primary residence exclusion doesn’t apply. Gains on non-primary-residence properties are fully taxable, and a 1031 exchange is the main tool for deferring that tax — something worth discussing with a CPA before listing.
Reducing Your Taxable Gain: What You Can Deduct
The two biggest levers for reducing your capital gain are your capital improvements and your selling costs.
Capital improvements that increase your cost basis:
- Kitchen remodels and additions
- Bathroom additions or full renovations
- New roof
- HVAC replacement
- Finished basement or added square footage
- New windows or exterior siding
- In-ground landscaping, patios, decks
- New driveway or garage
What does NOT increase your basis: Regular maintenance and repairs — painting, fixing a leaky pipe, patching drywall, replacing broken appliances. These keep the house in working order but don’t add to its value in the IRS’s eyes.
Selling costs you can deduct from your gain:
- Real estate commission (typically 5–6% of the sale price)
- Attorney fees (if applicable)
- Pre-listing repairs required by the buyer or lender
- Staging costs
- Transfer taxes and recording fees paid at closing
- Any seller concessions documented in the contract
This is where the math gets real for Berea sellers. On a $320,000 sale, a 5.5% commission alone is $17,600. That $17,600 reduces your taxable gain — not your sale price, but your profit. If you’re anywhere near the exclusion threshold, those deductions can push you below it entirely.
I always recommend that sellers pull together their improvement receipts before we meet — especially for any work done in the last five to ten years. A kitchen renovation from 2021, a new roof from 2023, or a finished basement from last year all count, and each one chips away at your taxable gain. For context, if you’re looking at a detailed breakdown of what you’ll net at closing — including commissions, transfer taxes, and fees — check out How Much Does It Cost to Sell a House in Berea, KY?
Capital gains calculations are separate from your closing-day costs, but they’re part of the same net proceeds conversation. Your tax liability affects your actual take-home, and it’s worth knowing both numbers before you commit to a sale timeline.
For most of my clients in The Oaks, Berkley Hall, and the surrounding Berea market, the full picture — especially after accounting for improvements and selling costs — means owing little or nothing. But that assumes you’ve held the home for at least two years and meet the residency test. If your situation is unusual (divorce, job relocation, inherited property, rental conversion), the rules get more nuanced, and this is exactly where a conversation with both a local REALTOR® and a CPA pays for itself.
Frequently Asked Questions
Do you have to pay capital gains tax when you sell your house in Kentucky?
Most homeowners in Kentucky do not owe capital gains tax on their home sale because of the federal primary residence exclusion — up to $250,000 in profit is tax-free for single filers and up to $500,000 for married couples filing jointly. To qualify, you must have owned and lived in the home as your primary residence for at least two of the last five years. Any taxable gain above the exclusion is subject to both federal capital gains tax and Kentucky’s 3.5% state income tax in 2026.
What is Kentucky’s capital gains tax rate in 2026?
Kentucky taxes capital gains as ordinary income at a flat rate of 3.5% for tax year 2026, down from 4.0% in 2025. Kentucky makes no distinction between short-term and long-term gains — all taxable gains are taxed at the same flat rate, in addition to any federal capital gains taxes owed.
What if I only lived in my home for one year — do I still qualify for the exclusion?
If you haven’t met the two-year ownership and residency requirement, you may still qualify for a partial exclusion if you had to sell due to a qualifying unforeseen circumstance — such as a job relocation, serious health issue, or other IRS-recognized hardship. The partial exclusion is prorated based on how much of the two-year requirement you completed. If neither applies and you’ve held the home less than two years, the gain is taxable at short-term federal rates plus Kentucky’s 3.5%.
Can I deduct the new kitchen or roof I added from my capital gains?
Yes. Capital improvements — permanent upgrades that add value to the home and have a useful life of more than one year — increase your cost basis and reduce your taxable gain. This includes projects like a kitchen remodel, roof replacement, new HVAC system, bathroom addition, or landscaping improvements. Routine maintenance (painting, fixing a leaky faucet) does not count. Keep receipts for all capital improvements, as they directly reduce your tax liability at sale.
Is Kentucky’s transfer tax the same as capital gains tax?
No — these are two entirely different taxes. Kentucky’s transfer tax is $0.50 per $500 of the sale price (0.1%), paid at closing by the seller regardless of whether you made a profit. Capital gains tax is an income tax on the profit from the sale, paid when you file your tax return. On a $300,000 home in Berea, the transfer tax at closing would be $300. Capital gains tax, if owed, would be calculated on your net profit after all deductions and exclusions.
For most Berea and Madison County homeowners who’ve lived in their home for two or more years, capital gains tax is a non-issue — the federal exclusion does its job. But knowing how to calculate your gain, which improvements to document, and which expenses reduce your taxable profit can still save you real money, especially as home values in our market continue to climb.
If you’re thinking about selling and want to know exactly what you’ll net — before we even talk about pricing or timing — that’s exactly the kind of conversation I have with every seller I work with. No pressure, just the real numbers.
Ready to see what your home is worth in today’s Berea market? Start here: toddky.com/selling
About Devin Todd Azbill, REALTOR®
Devin Todd Azbill is a licensed REALTOR® with Berkshire Hathaway HomeServices Foster Realtors and a lifelong Berea, Kentucky resident with over 100 closed transactions and $21M+ in career sales volume. She holds the ABR, SRES, PSA, e-PRO, and AHWD designations, was named a Top 2 BHHS agent in Kentucky (Q2 2025), and has earned 175 five-star reviews across Google, Zillow, Realtor.com, and FastExpert. Whether you’re buying, selling, downsizing, or relocating to Madison County, Devin brings local expertise, data-driven insights, and a proven track record to every transaction.
