In the suburban housing development of Cuesta Verde, California, the homes are modern and comfortable. Steven Freeling (Craig T. Nelson) is a successful real estate agent who works for a firm headed up by Teague (James Karen), a developer. Steven lives in one of the Cuesta Verde homes with his wife, Diane (JoBeth Williams), and their three children: teenage Dana (Dominique Dunne) and preteen youngsters Robbie (Oliver Robbins) and Carol Anne (Heather O'Rourke).
Strange events begin to occur when Carol Anne begins sleepwalking and carries on a seemingly one-sided conversation with a TV set that's turned on but has no signal. Soon thereafter her pet bird dies, and the family conducts a small burial service. Later that night, Carol Anne awakens again and talks to the television, while a spectral manifestation erupts from the television screen and enters the walls, causing an earthquake that only the Freelings feel. As the family wakes up, Carol Anne announces, "They're here."
The next morning, glasses break at breakfast, and forks bend by themselves. When Diane asks Carol Anne who she meant when she said "they're here," she answers, "The TV people." At first the ghosts play harmless tricks and amuse the mother, including moving and stacking the kitchen table chairs. Diane and Carol Anne discover an area in the kitchen where an unseen force will pull anything, including people, across the floor. Of course, Diane must convince Steven that night by showing him. He then announces that "Nobody goes into the kitchen until I know what's going on." Later, Steven has a conversation with his boss, Teague, about a new housing project going up. They talk about how Steven's company has built over cemeteries in the past, even where the Freelings live now.
During a terrible thunderstorm, a gnarled tree outside the kids' bedroom window comes to life and grabs Robbie (Oliver Robins), Carol Anne's brother, through a window. However, this is merely a distraction used by the ghosts to get Carol Anne's parents to leave her alone. Like a wind tunnel, they take Carol Anne through her bedroom closet into their dimension. Robbie is rescued, and the family believes that a tornado caused the trouble, until they realize that they can't find Carol Anne. They search the entire house including the new swimming pool until Robbie hears Carol Anne through the TV.
Steven reluctantly calls on a group of parapsychologists from UC Irvine: Dr. Lesh (Beatrice Straight), Ryan (Richard Lawson), and Marty (Martin Casella), who are awestruck by the manifestations they witness. With the parapsychologists present, the Freelings show them things they've never before seen. They open the door to the children's room to reveal toys and other objects flying around by themselves and disembodied laughing voices reverberating throughout the room. Previously, one of the parapsychologists described a Matchbox car taking seven hours to move seven feet, calling it "fantastic. Of course, this would never register on the naked eye." After they see the Freelings' house, they are all humbled.
Over coffee (and a coffee urn that moves by itself), the parapsychologists explain to the Freelings the difference between a poltergeist and a haunting. They determine that indeed, it is a poltergeist they are experiencing.
The group witnesses several paranormal episodes where they hear Carol Anne talking to Diane through the TV, see spirits, and hear the pounding footsteps of some terrible force, which subsequently injures Marty. Marty also suffers a terrifying hallucination where he seems to tear off his own face. The parapsychologists leave, admitting they need more help. Shaken and overwhelmed, Dana leaves to stay with friends. The Freelings also send Robbie to his grandmother's house for his safety.
When the parapsychologists return, they bring a spiritual medium, Tangina Barrons (Zelda Rubinstein), a tiny woman who uses her psychic sensitivity to ascertain facts about the disturbances. Tangina tells them that Carol Anne is "alive and in this house." According to Tangina, the spirits haunting the home have left this life but have not gone into the spectral "Light." They are stuck in between dimensions, watching their loved ones grow up, but feeling alone, causing them to feel lonely and even angry. Carol Anne was born in the house. Only 5 years old, she gives off her own life force that is as bright as the Light. It distracts and confuses the spirits, who think Carol Anne is their salvation. Hence, they have taken her.
What is also in the other dimension is a malevolent spirit. It likes that the spirits are confused and lost, and uses Carol Anne as a distraction so they cannot move on into the Light. Tangina says "it lies to her and tells her things only a child can understand. To her, it simply is another child. To us, it is the Beast."
They realize the entrance to the other dimension is through the children's bedroom closet. Tangina tests the dimensional portal with a few tennis balls that drop through the living room ceiling below the kids' closet. By tying a rope around a live person who can enter, and presumably exit the other side, with enough time to grab Carol Anne, they could bring her back. Tangina intends to be the one to go into the light, but Diane insists, saying that Carol Anne will only come to her mother. With the rope around her waist, Diane goes into the portal and Tangina coaxes the agonized spirits away from Carol Anne to the real Light. While Tangina is in her trance-like state telling the lost spirits to cross over into the Light, Steven panics and pulls on the rope, causing the Beast to appear right in front of him. Diane falls through the living room ceiling clutching Carol Anne and bearing new streaks of grey hair, presumably from fright; both Diane and Carol Anne are also covered in ectoplasm. After both are revived in the downstairs bathtub, Tangina pronounces that "this house is clean."
Unfortunately, though the spirits have seemingly moved on, the Beast hasn't, and wants revenge. On their final night in the house, Steven leaves Diane alone with the children so he can go and talk to Teague, who presumably is trying to get Steven to reconsider leaving. While Robbie and Carol Anne are getting ready for bed, Robbie's clown doll comes to life and pulls him under the bed. Diane, in the other room hears her son's screaming voice and tries to investigate, but is pulled against the wall and ceiling by an unseen force. Robbie manages to defeat the clown doll but a strange, mouth-like portal appears in Carol Anne's closet and attempts to suck the children in.
Diane tries to get to her son and daughter but runs into the Beast itself, in the form of a snarling, skeletal demon. It blocks Carol Anne's and Robbie's door and lunges at her, causing her to fall down the stairs. Diane runs to the backyard to seek help from her next-door neighbors, but slips into the freshly-dug swimming pool. A rainstorm has filled it with rain and mud, and as Diane tries to escape, coffins begin erupting from the earth, releasing skeletal corpses into the pool. Her neighbors hear the commotion and arrive to help Diane out of the pool, but they refuse to enter the house with its windows now blazing with ghostly energy, so Diane runs back into the house alone to get Robbie and Carol Anne. She finds Carol Anne and Robbie barely able to fight the energy that tries to suck them into the portal; they dangle from their bedframes, hanging on only by their hands, while their feet sway toward the closet door. Diane manages to pull them to safety and they run from the house.
Coffins and bodies begin exploding out of the ground throughout the neighborhood. Steven pulls up in his car with Teague as a passenger, and they both see the dead bodies erupting from the ground. Steven recalls the earlier conversation he had with Teague, where Teague revealed that Cuesta Verde was built over the site of a relocated cemetery. It is now obvious that Teague never really relocated the cemetery, he simply built the housing development over top of the graves after moving the headstones. Dana arrives in her boyfriend's car and is hysterical over what is happening to the house. The Freelings get into Steven's station wagon and they drive off. The Beast is so angry that the house implodes through the portal into the other dimension as stunned neighbors (including Teague) look on. The weary family checks into a hotel for the night. Not wishing to tempt fate, Steven pushes the television set outside their room.