Updated October 7, 2026. Quick answer: Generally no, if you qualify for the federal exclusion. Kentucky’s statute gives gross income the “same meaning as in Section 61 of the Internal Revenue Code”, so a gain excluded under section 121 is not income. Gain above the exclusion is taxed at a flat rate, “2026 Kentucky Tax Rate: 3.5% of taxable income”.
Kentucky tax on home sale profit at a glance
| Item | What the documents say |
|---|---|
| Profit on your main home | Gross income has the same meaning as in section 61 of the Internal Revenue Code; no document read mentions section 121 |
| Rate on gain above the exclusion | Flat 3.5% for taxable years beginning on or after January 1, 2026 (4% for 2024 and 2025) |
| Collected at the sale | No withholding found in the documents read. The grantor (seller) pays a real estate transfer tax of $0.50 for each $500 of value on the deed |
| Source | Kentucky Legislative Research Commission; Kentucky Department of Revenue; Kentucky General Assembly |
What the Kentucky documents say
KRS 141.010 says gross income has the “same meaning as in Section 61 of the Internal Revenue Code”, and KRS 141.019 builds adjusted gross income from the “deductions allowed individuals by Section 62 of the Internal Revenue Code”. 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 statute mentions section 121.
Chapter 1 (HB 1) of the 2025 session sets the rate at “three and one-half percent (3.5%) of net income” for taxable years beginning on or after January 1, 2026. The 2024 instructions read say “the tax rate for individual income tax is 4%”. The act also allows later annual reductions from 2027 under a statutory process, which this page does not apply.
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 Kentucky 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 Kentucky. 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 3.5%, the tax at the flat rate would be $3,500, before any other adjustment.
What is collected at the sale
The documents read show no Kentucky withholding or prepayment on a home sale; the Department’s withholding pages cover wages and pass-through entities. That is a gap in what was read, not a statement that none exists; ask the closing agent.
Kentucky does tax the deed. KRS 142.050 says “A tax upon the grantor named in the deed shall be imposed at the rate of fifty cents ($0.50) for each $500 of value or fraction thereof”, and the county clerk computes it when the deed is offered for recordation.
What changes in 2026
Kentucky: Chapter 1 (HB 1) of the 2025 session lowers the individual income tax rate from 4% to 3.5% for taxable years beginning on or after January 1, 2026.
What the documents do not say
- No document read mentions section 121, so conformity is reasoned from the statutes. The Form 740 instructions read are for tax year 2024, the newest archived, and have no home-sale line. Local occupational taxes were not read.
Common mistakes
- Using the 4% rate for a 2026 sale; the statute read sets 3.5% for taxable years beginning on or after January 1, 2026.
- Assuming Kentucky has its own home-sale exclusion; the documents read start from the federal definition of income.
- 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 Kentucky taxes capital gains, Kentucky retirement taxes, and home sale exclusion calculator.
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Answer againSources
- KRS 141.010 Definitions for chapter: https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=57913
- KRS 141.019 Calculation of adjusted gross income and net income: https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=57914
- 2026 Kentucky Withholding Tax Formula (42A003): https://revenue.ky.gov/Forms/2026%20Withholding%20Formula.pdf
- 2024 Kentucky Individual Income Tax Forms (Form 740 instructions): https://revenue.ky.gov/Forms/740%20instructions%20packet%20(2024).pdf
- Chapter 1 (HB 1), 2025 Regular Session: https://apps.legislature.ky.gov/law/acts/25RS/documents/0001.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
- KRS 142.050, Real estate transfer tax (Kentucky Legislature; read October 8, 2026): https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=43160
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.