Capital Gains Tax on the Sale of a Home: How It Works, Who Pays

The money you make on the sale of your home might be taxable. Here's how it works and how to avoid a big tax bill.
Tina Orem
By Tina Orem 
Edited by Chris Hutchison Reviewed by Lei Han

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It feels great to get a high price for the sale of your home, but in some cases, the IRS may want a piece of the action. That’s because capital gains on real estate can be taxable. Here’s how you can minimize or even avoid a tax bite on the sale of your house.

How do capital gains taxes work on real estate?

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

  • $250,000 of capital gains on real estate if you’re single.

  • $500,000 of capital gains on real estate if you’re married and filing jointly.

Let's say, for example, that you bought a home 10 years ago for $200,000 and sold it today for $800,000. Your net profit would be $600,000. If you’re married and filing jointly, $500,000 of that gain might not be subject to the capital gains tax (but $100,000 of the gain could be).

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When do you pay capital gains on a home sale?

You pay tax on the whole gain of your home sale if any of these factors are true:

  • The house wasn’t your principal residence.

  • You owned the property for less than two years in the five-year period before you sold it.

  • You didn’t live in the house for at least two years in the five-year period before you sold it. (People who are disabled, and people in the military, Foreign Service or intelligence community can get a break on this part, though; see IRS Publication 523 for details.)

  • You already claimed the $250,000 or $500,000 exclusion on another home in the two-year period before the sale of this home.

  • You bought the house through a like-kind exchange (basically swapping one investment property for another, also known as a 1031 exchange) in the past five years.

  • You are subject to expatriate tax.

Still not sure whether you qualify for the exclusion? Our tool might help; otherwise, scroll down for ways to avoid capital gains tax on a home sale:

If it turns out that all or part of the money you made on the sale of your house is taxable, you need to figure out what capital gains tax rate applies.

  • Short-term capital gains tax rates typically apply if you owned the asset for less than a year. The rate is equal to your ordinary income tax rate, also known as your tax bracket. (What tax bracket am I in?)

  • Long-term capital gains tax rates typically apply if you owned the asset for more than a year. The rates are much less onerous; many people qualify for a 0% tax rate. Everybody else pays either 15% or 20%. It depends on your filing status and income.

How to avoid capital gains tax on a home sale

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 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, as well as 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.

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