If you've owned your home for twenty, thirty, or forty years, the tax question is usually the scariest part of deciding to sell — and it's almost always scarier in your head than on paper. This guide walks through every tax that actually touches a home sale in Pennsylvania and New Jersey, with current figures and links to the primary sources, so you can replace dread with arithmetic.
Start with the good news
Three facts do most of the reassuring:
- Married couples can generally exclude up to $500,000 of profit ($250,000 single) from federal tax entirely.
- Pennsylvania charges zero state income tax on qualifying principal-residence sales.
- Your taxable gain is measured against what you paid plus decades of improvements — not the raw purchase price you remember.
Plenty of longtime Greater Philadelphia sellers owe nothing beyond transfer tax. The sections below tell you whether you're one of them.
Federal capital gains and the $250k/$500k exclusion
Under Section 121 of the tax code, you can exclude up to $250,000 of gain from the sale of your main home — $500,000 if married filing jointly. To qualify for the full exclusion:
- Ownership test: you owned the home for at least 2 of the 5 years ending on the sale date.
- Use test: you lived in it as your principal residence for at least 2 of those 5 years (the two tests don't have to be the same two years). For the full $500,000, both spouses must meet the use test; only one needs to meet ownership.
- Frequency: you haven't excluded gain from another home sale in the 2 years before this one.
Gain above the exclusion is taxed at long-term capital gains rates — 0%, 15%, or 20% depending on your taxable income (high earners may also owe the 3.8% net investment income tax). Two situations worth flagging:
- Recently widowed sellers: if you sell within two years of your spouse's death and haven't remarried, you may still qualify for the full $500,000 exclusion, provided the other conditions are met. See Publication 523.
- Partial exclusion: if you don't meet the two-year tests because of a health-related move, work relocation, or certain unforeseeable events, you may qualify for a prorated exclusion rather than none at all — highly relevant for moves into assisted living.
- Home office or rental history: depreciation you claimed after May 6, 1997 is “recaptured” at sale and can't be excluded — worth a CPA conversation if part of the house earned income.
Pennsylvania income tax: usually zero
Pennsylvania mirrors the federal spirit with its own rule: gain on the sale of a principal residence is exempt from PA personal income tax when you owned and physically occupied it as your principal residence for at least 2 of the 5 years before the sale, and didn't claim the exemption on another sale within the prior two years. No form is even required for a fully exempt sale. The details live in the Department of Revenue's REV-625 brochure.
The exception: if part of the property was used for business or rental (a home office you depreciated, a rented unit in a duplex), the gain attributable to that use is taxable and reported on PA Schedule 19.
New Jersey: the exclusion and the “exit tax”
New Jersey follows the federal Section 121 exclusion for income tax purposes — if your gain is fully excluded federally, NJ doesn't tax it either. What surprises South Jersey sellers is the closing-table paperwork known (inaccurately) as the exit tax:
- When the seller is a nonresident — including a resident moving out of state as part of the sale — New Jersey requires an estimated tax prepayment at closing: the greater of 10.75% of the taxable gain or 2% of the total sale price, per Division of Taxation bulletin TB-57.
- It's a prepayment, not an extra tax — you settle up on your NJ return, and overpayments come back as refunds.
- Most primary-residence sellers avoid the prepayment entirely by filing form GIT/REP-3 at closing — it covers NJ residents staying in-state and sellers whose entire gain is excluded under Section 121.
Transfer taxes: Philadelphia, the suburbs, and New Jersey
Transfer tax is the one tax nearly every seller pays, and the rates changed recently — much of what's published online is out of date:
| Where | Rate | Who customarily pays |
|---|---|---|
| City of Philadelphia | 4.578% total (3.578% city + 1% state) — raised from 4.278% on July 1, 2025 (phila.gov) | Split 50/50 by custom; negotiable |
| Most PA suburbs (Montgomery, Delaware, Bucks, Chester counties) | Typically 2% total (1% state + ~1% municipal/school district; a few municipalities charge more) | Split 50/50 by custom; negotiable |
| New Jersey | Graduated Realty Transfer Fee — roughly $4,175 on a $500,000 sale. Sellers 62+ selling an owner-occupied primary residence qualify for a partial exemption that roughly halves it (file form RTF-1; nj.gov FAQ) | Seller |
If the home was inherited
Inherited homes play by friendlier income-tax rules than most families expect: your cost basis steps up to the fair market value at the date of death (IRS Publication 551), so selling reasonably soon after inheriting usually produces little or no taxable gain — decades of the original owner's appreciation simply never gets income-taxed.
Pennsylvania's inheritance tax is a separate matter — 0% to a surviving spouse, 4.5% to children and grandchildren, 12% to siblings, 15% to others. We cover it, plus the authority-to-sell questions that come with estates, in Selling a Parent's House in Pennsylvania.
Keeping more of it
- Reconstruct your basis before you list. Receipts, permits, before/after photos, even credit-card statements for major projects. Every documented improvement dollar is a dollar off the taxable gain.
- Time the conversation, not just the sale. If your gain will exceed the exclusion, a CPA conversation before listing (not at filing time) preserves options — from documenting basis to coordinating the sale year with other income.
- Check the Property Tax/Rent Rebate for your next chapter. Pennsylvania pays income-eligible homeowners and renters 65+ (plus widows/widowers 50+ and people with disabilities) up to $1,000 a year — 2025 income limit $48,110 with half of Social Security excluded, and applications for 2025 are open through December 31, 2026 (pa.gov).
- Get the net-proceeds math done up front. A proper valuation should come with a seller net sheet — price, transfer tax, payoffs, and costs — so the number you plan around is the number you keep. That's standard in every valuation Samantha prepares.