What Home Sellers Must Know About Capital Gains Tax

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When you sell a property for more than what you originally paid for it, the difference is considered a capital gain. In real estate, this gain is subject to taxation by the IRS. Even though your primary residence may feel like "home," it’s still viewed as a financial asset when it appreciates in value.

This gain is determined by taking the final sale price and subtracting your purchase price along with qualifying expenses like closing costs or major home improvements. For instance, if you bought a property for $250,000 and sold it for $750,000, you’d be looking at a $500,000 gain, some or all of which could be taxable depending on your situation.

Sellers are expected to report their profits to the IRS when they file their annual tax returns.

What Factors Determine How Much Tax You’ll Owe?

The amount of capital gains tax you may owe on the sale of your home is influenced by several key elements:

• Your total taxable income

• Your tax filing status (single, married, etc.)

• How long you've owned the property before selling it

For homes owned longer than a year, the IRS applies long-term capital gains tax rates, which are often lower than ordinary income tax rates. As of 2025, these rates range from 0% to 20%, depending on income thresholds. On the other hand, homes sold within a year of purchase are taxed at your regular income rate, which can be significantly higher.

How the Primary Residence Exclusion Helps

The IRS offers an exemption for homeowners who sell their main residence. If you meet the necessary criteria, you could exclude up to $250,000 of profit from taxes as a single filer—or up to $500,000 if you’re married and filing jointly.

This benefit is available to those who pass the “2 out of 5” rule. In other words, you (or your spouse, in the case of joint filers) must have owned the property and both must have lived in it as your primary residence for at least two of the five years before the sale.

Who Can Qualify for This Exclusion?

To meet the IRS standard for a primary residence, you typically must treat the home as your main living space—using it as your legal address, receiving mail there, and spending most of your time in that location. If you own more than one property, it’s essential to determine which one meets these qualifications.

Additional rules include:

• You generally cannot claim this exclusion more than once within a two-year window.

• If you're recently divorced and received the home from a spouse who met the requirements, you may still be eligible.

• Service members under PCS (Permanent Change of Station) orders may be allowed to pause the ownership/use timeline.

• If the home was acquired through a like-kind exchange, the exclusion may not apply.

Smart Ways to Minimize or Avoid Capital Gains Tax

The most effective way to reduce or eliminate capital gains tax on your home is by qualifying for the primary residence exclusion. Planning ahead is key—particularly for those who flip homes quickly or experience major life changes.

Tips to reduce your tax burden include:

• Living in your home for at least two years before selling

• Tracking and documenting improvements and eligible expenses to increase your cost basis

• Understanding that certain unforeseen events (like a health crisis or job loss) may allow for a partial exemption even if you don’t meet all the usual criteria

Selling a home in under 12 months can lead to much higher taxes, so timing your sale thoughtfully can lead to significant savings.

Bottomline

Capital gains tax can take a bite out of your profits if you’re not prepared—but with the right approach, many sellers can minimize or avoid it entirely. If you’re thinking about buying or selling in Orange County, Whitestone Real Estate is here to help you navigate the process with confidence and clarity. Reach out today if you're considering a move—we’d love to help you make your transition smooth, strategic, and financially sound.

Reference: Johnson, A. (2025, April 21). Selling your home could cost capital gains tax on real estate. The Epoch Times.