Selling your primary residence triggers capital gains tax only on profit exceeding the Section 121 exclusion: $250,000 for single filers and $500,000 for married couples. For the 63% of sellers who qualify, no tax is owed. Those who exceed the exclusion, sell rental property, or sell before meeting the 2-year residency rule owe tax at long-term capital gains rates.
2026 Capital Gains Tax Rates
Long-term capital gains rates (property held more than 1 year):
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
|---|---|---|---|
| Single | Up to $47,025 | $47,026–$518,900 | Above $518,900 |
| Married filing jointly | Up to $94,050 | $94,051–$583,750 | Above $583,750 |
| Head of household | Up to $63,000 | $63,001–$551,350 | Above $551,350 |
Short-term capital gains (property held 1 year or less) are taxed as ordinary income — up to 37%.
The Primary Residence Exclusion (Section 121)
The most important real estate tax rule for homeowners:
| Feature | Details |
|---|---|
| Single filer exclusion | Up to $250,000 of profit tax-free |
| Married filing jointly | Up to $500,000 of profit tax-free |
| Ownership requirement | Must have owned the home for 2+ of last 5 years |
| Use requirement | Must have lived in home as primary residence for 2+ of last 5 years |
| Frequency limit | Can use exclusion once every 2 years |
| Partial exclusion | Available if you sell due to job change, health, or unforeseen circumstances before 2-year mark |
Example: Primary Residence Sale
A married couple bought a home in 2018 for $300,000, made $40,000 in improvements, and sold in 2026 for $780,000.
- Sale price: $780,000
- Adjusted basis: $300,000 + $40,000 improvements + $15,000 in selling costs = $355,000
- Profit: $780,000 − $355,000 = $425,000
- Exclusion (MFJ): −$500,000
- Taxable gain: $0 (profit under $500,000 exclusion)
If the same couple had a profit of $600,000:
- Taxable gain: $600,000 − $500,000 = $100,000
- Tax at 15%: $15,000
What Counts as Your “Basis”?
Your tax basis determines how much of the sale price is taxable profit:
| Basis Component | Effect on Taxes |
|---|---|
| Original purchase price | Increases basis (reduces taxable gain) |
| Closing costs when buying | Increases basis |
| Capital improvements (new roof, addition, kitchen remodel) | Increases basis |
| Selling costs (commissions, closing costs) | Reduces taxable gain |
| Casualty losses claimed | Decreases basis (increases taxable gain) |
| Depreciation taken (rental use) | Decreases basis |
Capital improvements vs repairs: Only permanent improvements that add value or extend the home’s life increase basis — a kitchen remodel, new HVAC, room addition, or new roof qualify. Routine repairs (painting, fixing a leaky faucet) do not.
Capital Gains on Rental Property
Rental property has no primary residence exclusion and carries an additional tax: depreciation recapture.
Depreciation Recapture
When you own a rental property, you must depreciate the structure over 27.5 years (IRS rules). When you sell, all depreciation ever claimed is “recaptured” and taxed at a maximum rate of 25% — regardless of your long-term capital gains rate.
Rental property sale example:
| Item | Amount |
|---|---|
| Purchase price (1998) | $200,000 |
| Less: land value (20%) | $40,000 |
| Depreciable basis | $160,000 |
| Years depreciated | 27.5 years |
| Annual depreciation | $5,818/year |
| Total depreciation claimed (20 years) | $116,360 |
| Adjusted basis | $200,000 − $116,360 = $83,640 |
| Sale price (2026) | $500,000 |
| Selling costs | $28,000 |
| Total taxable gain | $500,000 − $83,640 − $28,000 = $388,360 |
| Depreciation recapture (taxed at 25%) | $116,360 × 25% = $29,090 |
| Remaining gain taxed at LT cap gains rate (15%) | $271,940 × 15% = $40,791 |
| Total federal tax | $69,881 |
The 1031 Exchange: Defer All Tax
A Section 1031 (like-kind) exchange lets real estate investors sell an investment property and defer all capital gains and depreciation recapture tax by reinvesting the proceeds into a new investment property.
| 1031 Exchange Rule | Requirement |
|---|---|
| Property type | Must be investment or business property (not primary residence) |
| Identification window | Must identify replacement property within 45 days of sale |
| Closing window | Must close on replacement property within 180 days of sale |
| Value | Replacement property must be of equal or greater value |
| Equity | Must reinvest all equity (no cash-out) |
A 1031 exchange defers — not eliminates — the tax. When you eventually sell the replacement property without another 1031, all deferred gains become due.
The capital gains rate on your sale depends on your income and holding period — see 2026 capital gains tax rates for the 0%, 15%, and 20% long-term thresholds. High earners may also owe the net investment income tax (NIIT), which adds 3.8% on investment income above $200,000 (single) or $250,000 (married). For the primary residence exclusion rules and depreciation recapture, see capital gains on home sale.
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