Capital Gains Tax When You Sell Your Home

You made a profit on your home. The IRS may want part of it, but the rules are usually more generous than homeowners expect. This is the plain-English version of how the tax actually works.

What capital gains tax means

When you sell something for more than you paid, the profit is a capital gain. Homes are different from stocks or crypto because a primary residence can qualify for a large federal exclusion before tax is applied.

The basic math

Your gain starts with a simple formula: sale price minus cost basis equals capital gain. Cost basis is not only what you paid. It can also include major capital improvements and some buying costs.

Bought for $300,000 and sold for $550,000? Your gross capital gain starts at $250,000 before any exclusion is applied.

The Section 121 exclusion

If the home was your primary residence, federal law can exclude:

• $250,000 if you file single
• $500,000 if you are married filing jointly

To qualify, you generally need to have owned and lived in the home for at least 2 of the last 5 years.

What tax rate applies after the exclusion

If part of the gain is still taxable, the remaining amount is taxed at long-term capital gains rates if you owned the property more than one year. Higher earners may also owe the 3.8% Net Investment Income Tax. State taxes may apply on top.

What increases basis and lowers tax

Major improvements matter. A kitchen remodel, addition, new roof, or finished basement can increase basis and reduce taxable gain. Routine maintenance usually does not.

What this means for your decision

The question is not just “what is my equity?” It is “what would I actually keep after commissions, closing costs, repairs, and tax?” That is the number that belongs in a keep-versus-sell decision.