Understanding Capital Gains When Selling a Home

What It Is, When It Applies, and How to Potentially Avoid It

Selling your home can bring in a nice profit — but that profit may come with a tax bill. If you’ve heard the term “capital gains,” you might be wondering how it affects you when you sell.

Let’s break it down in simple terms so you can go into your home sale with clarity and confidence.

1. What Are Capital Gains?

Capital gains are the profits you earn from selling an asset — in this case, your home — for more than you paid for it.

Example:

• You bought your home for $300,000

• You sell it for $500,000

• Your capital gain is $200,000

But the good news is, not all of that gain is automatically taxed.

2. When Do Capital Gains Taxes Apply to Home Sales?

The IRS allows homeowners to exclude a portion of their capital gains if certain conditions are met. This is known as the Section 121 exclusion.

As of now, you can exclude up to:

• $250,000 of profit if you’re single

• $500,000 if you’re married and filing jointly

To qualify:

• The home must be your primary residence

• You must have owned and lived in it for at least 2 of the last 5 years before the sale

• You haven’t claimed this exclusion on another home sale in the past 2 years

3. How to Calculate Your Capital Gain

It’s not just sale price minus purchase price. Here’s what’s typically included:

Sale Price– Original Purchase Price– Qualifying Improvements (like a kitchen remodel, new roof, or room addition)– Selling Costs (like agent commissions and closing costs)= Capital Gain

Your gain may be lower than you think once you factor in expenses and upgrades.

4. What If You Don’t Qualify for the Exclusion?

If you don’t meet the ownership and use requirements, or your gain exceeds the exclusion limit, you may owe capital gains tax.

There are two types:

• Short-term capital gains (if you owned the home less than a year): taxed at your regular income tax rate

• Long-term capital gains (owned for more than a year): taxed at 0%, 15%, or 20%, depending on your income

5. Can You Reduce or Avoid Capital Gains Tax?

Yes — here are a few tips:

• Keep records of all home improvements

• Time your sale to meet the 2-out-of-5-year rule

• Consider a 1031 exchange if you’re selling an investment property and buying another

• Consult a tax advisor to explore deductions or exclusions specific to your situation

Final Thoughts

Understanding capital gains can help you plan smarter, avoid surprises, and potentially keep more of your profit in your pocket.

Thinking about selling your home?Let’s talk strategy. I’ll help you prepare your home for the market and connect you with a trusted tax expert to guide you through the financial details.