Updated October 7, 2026. Quick answer: Generally no, if you qualify for the federal exclusion. Indiana’s Form IT-40 starts from “Enter your federal adjusted gross income from your federal income tax return”, and a gain excluded under section 121 is not in it. Gain above the exclusion is taxed at a flat rate: “two and ninety-five hundredths percent (2.95%)” for taxable years beginning after December 31, 2025 and before January 1, 2027.
Indiana tax on home sale profit at a glance
| Item | What the documents say |
|---|---|
| Profit on your main home | Indiana adjusted gross income is defined from federal adjusted gross income; no document read mentions section 121 |
| Rate on gain above the exclusion | Flat 2.95% for taxable years beginning after December 31, 2025 and before January 1, 2027 (3% on the 2025 return) |
| Collected at the sale | None found in the documents read |
| Source | Indiana General Assembly; Indiana Department of Revenue |
What the Indiana documents say
Indiana Code 6-3-1-3.5 defines adjusted gross income for an individual with reference to federal adjusted gross income “(as defined in Section 62 of the Internal Revenue Code)”, and the 2025 Form IT-40 begins with federal adjusted gross income. Under the federal statute, “Gross income shall not include gain from the sale or exchange” of a principal residence that meets the ownership and use tests, so an excluded gain never enters federal adjusted gross income. That is reasoning from two documents. Neither document mentions section 121.
The 2025 form computes the state tax this way: “State adjusted gross income tax: multiply line 7 by 3% (.03)”. For later years Indiana Code 6-3-2-1 sets the rate at “two and ninety-five hundredths percent (2.95%)” for taxable years beginning after December 31, 2025 and before January 1, 2027.
What the federal exclusion requires
Most state answers start here. The statute says “Gross income shall not include gain from the sale or exchange” of property that, during the five years before the sale, you owned and used as your principal residence for periods adding up to two years or more. The limit is “shall not exceed $250,000”, or $500,000 for a husband and wife who make a joint return and meet the statute’s conditions. See CMG’s home sale taxes page and exclusion calculator.
A worked example at a $400,000 gain
An illustration, not a return: a married couple in Indiana sells their main home with a gain of $400,000 and meets the federal ownership and use tests. The gain is below the $500,000 joint exclusion, so it is not in federal adjusted gross income and, on the documents read, $0 is taxed by Indiana. As a second illustration, computed below, suppose the gain were $600,000. The amount above the exclusion would then be $100,000 and, computed as that excess times 2.95%, the tax at the flat rate would be $2,950, before county income tax and any other adjustment.
What is collected at the sale
The documents read show no Indiana withholding, prepayment or transfer tax on a home sale. That is a gap in what was read, not a statement that none exists; ask the closing agent.
What changes in 2026
Indiana: Indiana Code 6-3-2-1 sets the individual rate at 2.95% for taxable years beginning after December 31, 2025, down from 3%.
What the documents do not say
- No document read mentions section 121, so conformity is reasoned from the federal starting point. Indiana counties levy their own income taxes, which were not read. The form read is for tax year 2025; the 2.95% rate comes from the statute.
Common mistakes
- Using the 3% rate on the 2025 form for a 2026 sale; the statute read sets 2.95% for taxable years beginning after December 31, 2025.
- Forgetting that Indiana counties levy their own income taxes, which this page does not read.
- Assuming the answer for one state applies to another, or that the state answer changes the federal tax on the sale.
Related: home sale taxes, state tax on home sale profit, how Indiana taxes capital gains, Indiana retirement taxes, and home sale exclusion calculator.
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Answer againSources
- Indiana Code Title 6, Article 3 Chapter 1 (Definitions): https://iga.in.gov/ic/2024/Title_6/Article_3/Chapter_1.pdf
- 2025 Form IT-40 Indiana Full-Year Resident Individual Income Tax Return: https://forms.in.gov/Download.aspx?id=16914
- Indiana Code Title 6, Article 3 Chapter 2 (Imposition of Tax): https://iga.in.gov/ic/2024/Title_6/Article_3/Chapter_2.pdf
- 26 U.S.C. 121, Exclusion of gain from sale of principal residence (U.S. Code, GovInfo): https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapB-partIII-sec121.htm
Sources: the primary documents linked above, read on October 7, 2026. General information, not tax advice. Your own facts decide the outcome, and a tax professional or the state agency itself is the right place to confirm anything consequential.