For most homeowners, their house is their biggest investment. That's why reducing taxes on the sale of their house can be so important.
Homeowners looking to sell their principal home should know about capital gain taxes and how to mitigate their tax bill. There are several strategies to minimize your taxable gain on real estate, which will reduce your potential tax liability.
What Is a Capital Gains Tax?
Capital gains tax is the tax you pay on profits from an investment, such as the profit on a home sale. The tax is calculated on the gain from the sale of the capital asset. To determine the gain, you subtract the sales price from the adjusted basis and subtract selling costs. The federal government taxes capital gains; your state may as well. Only Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming do not charge state tax on capital gains.
To illustrate, if you bought a home in 2015 for $400,000 and sold it for $600,000, your profit on that home is $200,000. However, you may not have to pay capital gains tax on the full $200,000, especially if you made improvements. The initial purchase price plus what money you spent on improvements make up your adjusted basis.
So, for this example, if you made renovations such as putting on a new roof and remodeled a bathroom for an amount of $50,000, your adjusted basis is the purchase price plus the improvements ($400,000 + $50,000 = $450,000)
You subtract the adjusted basis and closing costs from the sales price to calculate your net capital gain.
Sales Price $600,000
Adjusted Basis -$450,000
(Original Purchase Price + Improvements)
Closing Costs - $30,000
Net Capital Gain $120,000 (before exclusion)
What Is the Capital Gains Exclusion?
If you lived in your home for at least two of the past five years before the sale (as your primary residence), you can exclude up to $250,000 of the net capital gain before you pay a capital gains tax. The exclusion for a married couple filing jointly is $500,000. In the above example, if you were a single filer, your $250,000 capital gains tax exclusion covers the $120,000 net capital gain. Therefore, you do not have to pay a federal capital gains tax.
Note, however, you may not use this exclusion if you used it on another primary residence in the past two years.
What Is the Tax on Capital Gains?
Capital gains are taxed differently depending on whether they are short-term or long-term capital gains.
A short-term capital gain is for investments you own for less than a year. The short-term capital gains rate is taxed at the ordinary income tax rates. So if you are in the 15% tax bracket, you pay 15% on the capital gains.
Long-term capital gains are for investments that you own for over one year. The long-term capital gains tax rates depend on your income but range from 0% to 20%.
Changing the above example slightly, let's say the sale of your home was $900,000, with closing costs of $45,000. Your net capital gain would be $405,000. Even with the capital gains tax exclusion of $250,000, you must pay capital gains tax on the $155,000 difference. If a single filer’s taxable income in 2025 is between $48,351 and $533,400, the tax rate is 15%. The taxpayer must pay $23,250 in long-term capital gains tax.
Tips for Reducing Capital Gains Taxes
For homeowners who sell above the exclusion, there are a few things you can do to minimize capital gains tax:
- Keep all receipts of capital improvements and upgrades, such as kitchen or bath remodeling, building additions, flooring, adding solar panels, etc.
- Keep records of certain closing costs when you purchased the property, such as title search and recording fees.
- Keep statements on selling costs such as commissions, transfer taxes, title insurance, staging, and legal fees.
- Make sure you qualify for the ownership and use tests of two of the past five years. Note that you may claim a prorated exclusion if you must sell because of a qualified job relocation, health reasons, or unforeseen circumstances.
- Improve your primary residence and enjoy the improvements while increasing your adjusted basis.
- Turn your primary residence into a rental property to defer capital gains tax. The property must be rented at fair market value for a period of time. Consult a tax attorney, tax accountant, or financial services advisor about this strategy to comply with IRS rules.
Capital Gains Taxes and Investment Property
If you have an investment property, such as a rental property, you cannot use your exclusion. However, you can defer capital gains taxes by a like-kind exchange. That is where you purchase a new investment property within 180 days of the date of the sale of your original investment property. The property must be of a similar nature, character, or class, so you can’t sell your beach house in exchange for a commercial office building.
Will There Be Capital Tax Breaks for the Homeowner?
In July, 2025, Republican congresswoman Marjorie Taylor Greene proposed the No Tax on Home Sales Act. This bill, if passed, would eliminate the capital gain exclusion limits on home sales. This means that homeowners would not have to pay capital gains tax on the sale of primary residences.
In the meantime, to minimize your capital gains on a home sale, document every improvement and expense, confirm you qualify for the primary residence exclusion, and plan the timing so your gain is treated as long-term.
Related Resources
- Getting Legal Help To Defer Capital Gains Taxes on Real Estate (SuperLawyers)
- Find a Tax Lawyer Near Me (FindLaw's Attorney Directory)
- The Home Sale Exemption (Learn About the Law (Real Estate Law)
