What to Know About Capital Gains Tax When Selling Your Home
When selling a home, most owners are focused on getting the best price. But one important factor that can affect your bottom line is capital gains tax.
What Is Capital Gains Tax?
Capital gains tax is applied to the profit made when selling a property that’s increased in value. This usually applies when you sell for more than you paid—plus any improvements made.
Do You Have to Pay It?
Maybe not! The IRS allows many homeowners to exclude part of their profit from taxes if the home was their primary residence for at least 2 of the last 5 years.
- Single filer: Exclude up to $250,000
- Married filing jointly: Exclude up to $500,000
If your gain is below the limit, you owe no tax. If it’s over, you only pay tax on the extra amount.
Who Qualifies for the Exclusion?
To qualify, all of the following must be true:
- You lived in the home for 2 out of the last 5 years
- You haven’t claimed this exclusion in the last 2 years
- Your gain is under $250k (single) or $500k (married)
When Might Capital Gains Tax Apply?
You might owe tax if:
- You sell for more than the allowed exclusion
- The home was a rental or second home
- You owned the home for less than a year
Tax rates vary:
- Short-term (less than 1 year): Taxed at your income rate
- Long-term (1+ year): Usually taxed at 0%–20%, based on income
What If a Spouse Passes Away?
If your spouse has passed, you may benefit from a step-up in basis. This adjusts the property’s value to its market price at the time of their death, not the original purchase price.
Example:
Bought home for $300,000 → Worth $600,000 at spouse’s death
If sold for $650,000, you only pay tax on $50,000 of gain—not $350,000.
This can mean huge tax savings.
How to Reduce Capital Gains Tax
- Hold the home for over a year for lower tax rates
- Use your primary residence exclusion if eligible
- Track all home improvements to increase your cost basis
- Understand step-up basis if you’ve inherited the home
Are There Exceptions?
Yes. If you sell due to a job change, health reasons, or an emergency, you may qualify for partial exclusion. Always check with a tax expert.
Let’s Talk
If you’re thinking about selling, it’s important to understand the full financial picture—including capital gains. I’m here to help guide you every step of the way.
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