Capital Gains Tax on Real Estate

There can be capital gains taxes on home or real estate sales, which means profit on the sale of your home might be taxed. Here's how it works and how to avoid a big tax bill.

When you sell a house for more than what you paid for it, you could be subject to a capital gains tax on the profit you make from the sale. The good news is that many people avoid paying capital gains tax on the sale of their primary home because of an IRS rule that lets you exclude a certain amount of the gain from your taxable income. 

Generally, people who qualify for the home sale capital gain exclusion can exclude:

$250,000 of capital gains if single.

$500,000 of capital gains if married and filing jointly.

How to avoid capital gains tax on real estate

1. Live in the house for at least two years

The two years don’t need to be consecutive, but house-flippers should beware. If you sell a house that you didn’t live in for at least two years, the gains can be taxable. Selling in less than a year is especially expensive because you could be subject to the short-term capital gains tax, which is higher than the long-term capital gains tax.

2. See whether you qualify for an exception

If you have a taxable gain on the sale of your home, you might still be able to exclude some of it if you sold the house because of work, health or “an unforeseeable event,” according to the IRS. Check IRS Publication 523 for details. 

3. Keep the receipts for your home improvements

The cost basis of your home typically includes what you paid to purchase it, plus the improvements you've made over the years. When your cost basis is higher, your exposure to the capital gains tax may be lower. Remodels, expansions, new windows, landscaping, fences, new driveways, air conditioning installs — they’re all examples of things that might cut your capital gains tax.

Example:

If you bought a home for $400,000 and sold it for $1M  and you lived there for 2 of the past 5 years as your primary residence, your gain is $600,000. If you’re married you can deduct $500,000 from that gain, plus, if you spent $100,000 on upgrades you can also deduct that, so you’ll have zero capital gains.

This information is not to be taken as legal or accounting advice. You should always contact your attorney or accountant when selling your home.