Learn how capital gains tax applies to home sales and real estate investments.
Primary Residence Exclusion
If your home is your primary residence, you may exclude a significant gain from taxes:
| Filing Status | Maximum Exclusion |
|---|---|
| Single | $250,000 |
| Married Filing Jointly | $500,000 |
Requirements
| Requirement | Details |
|---|---|
| Ownership | Owned for 2+ of last 5 years |
| Residence | Lived there 2+ of last 5 years |
| Frequency | Haven’t used exclusion in past 2 years |
| Documentation | Keep records of purchase and improvements |
Example: Primary Residence
| Item | Amount |
|---|---|
| Original purchase price | $300,000 |
| Cost of improvements | $50,000 |
| Cost basis | $350,000 |
| Sale price | $550,000 |
| Selling costs | $33,000 |
| Net proceeds | $517,000 |
| Capital gain | $167,000 |
| Exclusion (married) | $500,000 |
| Taxable gain | $0 |
When You Owe Capital Gains Tax
Exceeding the Exclusion
Married couple, gained $600,000:
| Item | Amount |
|---|---|
| Total gain | $600,000 |
| Exclusion | -$500,000 |
| Taxable gain | $100,000 |
| Tax (at 15% rate) | $15,000 |
Not Meeting Requirements
| Situation | Tax Treatment |
|---|---|
| Lived there < 2 years | Partial exclusion possible* |
| Investment property | Full gain taxable |
| Rental property | Full gain taxable |
| Flipped (< 1 year) | Short-term rates |
*Partial exclusion if moved for work, health, or unforeseen circumstances
Capital Gains Tax Rates
Long-Term (Held Over 1 Year)
| 2026 Taxable Income (Single) | Rate |
|---|---|
| $0 - $48,350 | 0% |
| $48,350 - $533,400 | 15% |
| Over $533,400 | 20% |
| 2026 Taxable Income (Married) | Rate |
|---|---|
| $0 - $96,700 | 0% |
| $96,700 - $600,050 | 15% |
| Over $600,050 | 20% |
Short-Term (Held Under 1 Year)
Taxed as ordinary income (10%-37% depending on bracket)
Net Investment Income Tax
High earners may also owe 3.8% NIIT on:
- Single: Income over $200,000
- Married: Income over $250,000
Calculating Capital Gains
Step-by-Step
Sale Price
- Selling Costs (commissions, fees)
= Net Proceeds
Original Purchase Price
+ Closing Costs (when bought)
+ Capital Improvements
+ Selling Costs (when sold)
= Adjusted Cost Basis
Net Proceeds - Adjusted Cost Basis = Capital Gain
What Counts as Cost Basis
| Included | Not Included |
|---|---|
| Purchase price | Furniture |
| Closing costs (buy) | Repairs/maintenance |
| Major improvements | Insurance premiums |
| Assessments | Property taxes |
| Legal fees | Utility costs |
Common Improvements to Track
| Improvement | Adds to Basis? |
|---|---|
| Kitchen remodel | Yes |
| Room addition | Yes |
| New roof | Yes |
| New HVAC | Yes |
| Landscaping | Yes (permanent) |
| Painting | Usually no (maintenance) |
| Appliances | Usually no |
Investment Property Tax Rules
Investment properties don’t qualify for the primary residence exclusion:
Example: Rental Property
| Item | Amount |
|---|---|
| Purchase price | $200,000 |
| Improvements | $30,000 |
| Depreciation claimed | -$50,000 |
| Adjusted basis | $180,000 |
| Sale price | $350,000 |
| Selling costs | -$21,000 |
| Net proceeds | $329,000 |
| Capital gain | $149,000 |
Depreciation Recapture
| Type | Tax Rate |
|---|---|
| Depreciation recapture | 25% |
| Remaining gain (long-term) | 0/15/20% |
Using example above:
| Component | Amount | Tax Rate | Tax |
|---|---|---|---|
| Depreciation recapture | $50,000 | 25% | $12,500 |
| Remaining gain | $99,000 | 15% | $14,850 |
| Total tax | $27,350 |
Strategies to Reduce Capital Gains
1031 Exchange
Defer taxes by exchanging for another investment property:
| Requirement | Details |
|---|---|
| Property type | Like-kind (investment for investment) |
| Timeline | 45 days to identify, 180 days to close |
| Value | Must be equal or greater value |
| Primary residence | Not eligible |
Installment Sale
Spread the gain over multiple years:
- Receive payments over time
- Report gains as received
- May lower annual tax bracket
Opportunity Zones
Invest gains in designated opportunity zones:
- Defer original gain until 2026
- Reduce gain by 10% if held 5+ years
- Exclude gains on new investment if held 10+ years
Convert to Primary Residence
- Move into rental for 2+ years before selling
- Qualify for primary residence exclusion
- Note: Rules limit exclusion for properties previously rented
State Capital Gains Taxes
| State | Rate |
|---|---|
| No state capital gains tax | AK, FL, NV, NH*, SD, TN*, TX, WA*, WY |
| California | Up to 13.3% |
| New York | Up to 8.82% |
| New Jersey | Up to 10.75% |
| Most states | Taxed as income |
*Some states tax only dividends/interest, not all capital gains
Record-Keeping Checklist
Keep these documents for tax purposes:
| Document | Purpose |
|---|---|
| Settlement statement (buy) | Proves cost basis |
| Improvement receipts | Adds to basis |
| Settlement statement (sell) | Proves sale price |
| Mortgage statements | Documents costs |
| Depreciation records | For rentals |
| 1099-S form | Reports sale to IRS |
Keep records for at least 3 years after filing (7 years recommended)
Related: Selling a House Guide | Investment Property Calculator | 1031 Exchange Guide