Many longtime homeowners have seen their modest family houses transform into unexpected gold mines. The modest abode they bought decades ago might have doubled—or even tripled—in value, promising a comfortable cushion for retirement. But when they move to sell, that joy can quickly fade to shock when their accountant delivers the bad news: A slice of that hard-earned profit is headed straight to the IRS.
Years of soaring home prices have turned ordinary homeowners into accidental millionaires—and, in many cases, unexpected taxpayers. What used to be a concern only for the ultrawealthy or lifelong owners now reaches far more everyday sellers than ever before. Nearly 8% of all U.S. home sales last year netted more than $500,000 in profit—a sixfold jump from two decades ago.
So, what exactly is a capital gains tax? Why is this once-rare tax bill landing on more kitchen tables these days? And, most importantly, how can you keep more of your profit when you sell? Here’s what every homeowner should know before planting that “For Sale” sign in the yard.
Home sale capital gains 101: Understanding the exclusion
The capital gains tax is levied on the profit you make when you sell an asset, like stocks, real estate, or a business. But for homeowners, special rules have long shielded everyday sellers from owing tax on the sale of their primary home—at least up to a point.
When you sell your primary home, the IRS lets you protect a big chunk of your profit from capital gains taxes. Single homeowners can exclude up to $250,000 of profit from taxes, while married couples filing jointly can exclude up to $500,000. If your profit stays below these limits, you won’t owe a penny of federal capital gains tax on your home sale.
Who qualifies?
To claim the full exemption, you must meet three basic rules:
- Ownership: You must have owned the home for at least two of the past five years.
- Use: You must have lived in it as your main residence for at least two of the past five years.
- Timing: You can’t have used this exclusion for another home sale within the past two years.
These requirements prevent people from flipping multiple properties tax-free and are designed to help long-term homeowners keep more of their equity.
Why more sellers are facing capital gains taxes now
Skyrocketing prices, same old tax limits. The $250,000/$500,000 capital gains exclusion was set in 1997 and hasn’t budged since. Meanwhile, U.S. home prices have soared, especially in the past decade.
For context, the national median home price roughly doubled from 2012 to 2022. If you adjust for inflation, a $500,000 exemption set in 1997 would be worth over $1 million today. But the law never changed, so the cap still sits at a half-million dollars. That means today’s homeowners, especially in hot markets, hit the limit far more easily than sellers did 20 or 30 years ago.
How capital gains tax on a home sale is calculated
To calculate your own gain, start with this simple formula: capital gain = selling price − (purchase price + improvements/expenses)
Your eligible costs, also known as your cost basis, include what you paid for the home plus any major improvements and certain selling expenses. This can include remodeling a kitchen, adding a room, installing a new roof, or putting in a pool. Selling expenses like real estate agent commissions and some closing costs count, too.
Once you know your profit, you subtract the allowed exclusion: $250,000 for single filers or $500,000 for married couples filing jointly. If your profit stays below that threshold, you’re in the clear for federal capital gains tax. If it’s over, only the amount above the limit gets taxed.
