Understanding Capital Gains Tax on Home Sales

Are you thinking of selling your primary residence? Unless the home has decreased in value since you bought it, you’ll want to know about potential capital gains tax on your sale. You don’t want to incur a larger-thannecessary tax bill.


Gains on the sale of personal or investment property held for more than one year are taxed at favorable capital gains rates of 0%, 15%, or 20%, plus a 3.8% investment tax for people with higher incomes. Gains on these properties held for one year or less are taxed at higher ordinary income rates. Residential real estate is an exception.


Up to $250,000 ($500,000 for joint filers) of your gain is tax-free if you’ve owned and lived in your home for at least two out of the five years before you sell. Any gain greater than this exclusion is taxed at capital gains rates. Losses from the sale are not deductible. A spouse who sells the family home within two years after the other spouse’s death gets the total $500,000 exclusion, provided the two-out-of-five-year use and ownership tests were met before death.


If you must sell your home before two years due to job changes, illness, or unforeseen circumstances, you may still be eligible for part of the gain exclusion. The exclusion percentage that can be taken equals the portion of the two years you used the home as a residence.


Was your home damaged or destroyed in one of this year’s federally declared natural disasters? Then your capital gain amount will equal any insurance proceeds you received that exceed your pre-disaster tax basis in the home. The gain exclusion is available for this gain amount.

Home sales are complex and can be emotional. Consult your tax and real estate professionals before selling. Your financial professional can help you budget for your new home.