Selling a home at a profit feels great, but it comes with one possible downside: When you sell any asset at a price that’s higher than what you paid for it, it’s called a capital gain – and you may have to share a portion of that gain with the IRS.
While capital gains can apply to assets like stocks and bonds, they also apply to real estate. Here, we’ll explain how capital gains tax on real estate works so that you know what to expect if you sell a home.
Key Takeaways:
- You may owe capital gains tax on real estate if you sell a property at a profit.
- The amount of tax you owe may depend on how long you owned the property and your tax bracket.
- There are steps you can take to reduce your capital gains tax liability.
What Is Capital Gains Tax On Real Estate?
If you sell any investment that increases in value, you may have to pay a capital gains tax on the profit. Capital gains tax refers to the tax on the profit (or gain) you receive when you sell a capital asset. When do you pay capital gains tax on real estate, and how much is it? The amount depends on several factors, including your income, tax filing status and the length of time you owned the asset.
While any asset that appreciates is subject to capital gains taxes, the taxes related to real estate come with their own special rules. Some rules, for instance, provide an exemption on the sale of a primary residence.
If you sell a home you’ve owned for a year or less, you may have to pay short-term capital gains tax. But if you own the house for more than a year, you’ll be bumped into the more favorable long-term capital gains tax rate.
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When Do You Pay Capital Gains Tax On Real Estate?
Selling a home after it has increased in value often triggers a capital gains tax, but not always. You may be eligible for a capital gains tax exclusion of $250,000 as a single tax-filer or $500,000 as a married couple filing jointly if you meet these criteria:
- The home was your principal residence.
- You owned and used the home for at least two years.
- You lived in the home for at least two years during the five years preceding its sale.
Let’s say you’re married and filing jointly and you sell your home for $750,000. If you bought it for only $250,000, you could be on the hook for capital gains taxes. You will pay this tax on your realized gains – the profit you make after paying off your remaining mortgage balance and any fees related to the sale. But because of the exclusion, you actually wouldn’t owe taxes in this situation. If you sold the home for $800,000, however, you’re more likely to owe taxes, but only on the $50,000 that exceeds the $500,000 exclusion. It’s a good idea before making any financial decisions to consult a tax professional to make sure you understand your tax liability and where you may qualify for exclusions.
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How Does The Capital Gains Tax Work For The Sale Of A Home?
Capital gains and losses are handled according to the holding period that applies to the assets you’re selling:
- You pay short-term capital gains at your ordinary income tax rate (potentially up to 37%) on profits you make from selling assets you’ve held for a year or less.
- You pay long-term capital gains of up to 20% from assets you’ve held for longer than a year.
You’ll generally pay less in taxes on long-term capital gains than on short-term capital gains.
Let’s reframe this example within a real estate context. Say you own a property for six months. If you sell it for a profit after that time, it’s considered a short-term gain. You’ll be taxed at your marginal tax rate (or tax bracket). However, if you sell that same home after owning it for 13 months, you’ll be looking at long-term capital gains.
Short-Term Capital Gains Tax Rates
Short-term capital gains are typically subject to taxes at the standard rates that are applicable to ordinary income. Some things to consider regarding short-term capital gains include:
- The holding period for these gains begins the day after the asset acquisition and ends on the day of sale.
- Ordinary tax rates, ranging from 10% to 37%, apply to short-term capital gains, with the specific rate determined by your income level and filing status.
Here’s what short-term capital gains tax rates look like for 2026 for different taxable income levels:
| Tax Rate | Single Filer | Married Filing Jointly and Surviving Spouses | Head of Household | Married Filing Separately |
|---|---|---|---|---|
| 10% | $0 – $12,400 | $0 – $24,800 | $0 – $17,700 | $0 – $12,400 |
| 12% | $12,401 – $50,400 | $24,801 – $100,800 | $17,701 – $67,450 | $12,401 – $50,400 |
| 22% | $50,401 – $105,700 | $100,801 – $211,400 | $67,451 – $105,700 | $50,401 – $105,700 |
| 24% | $105,701 – $201,775 | $211,401 – $403,550 | $105,701 – $201,7750 | $105,701 – $201,775 |
| 32% | $201,776 – $256,225 | $403,551 – $512,450 | $201,751 – $256,200 | $201,776 – $256,225 |
| 35% | $256,226 – $640,600 | $512,451 – $768,700 | $256,201 – $640,600 | $256,226 – $384,350 |
| 37% | $640,601 or more | $768,701 or more | $640,601 or more | $384,351 or more |
Long-Term Capital Gains Tax Rates
By owning assets for more than a year, usually you can take advantage of a lower tax rate on the resulting profits. Individuals in lower tax brackets may even be exempt from paying any long-term capital gains tax on real estate.
Here’s what long-term capital gains look like in 2026 for different taxable income levels:
| Tax Rate | Single Filer | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 0% | $0 – $49,450 | $0 – $98,900 | $0 – $49,450 | $0 – $66,200 |
| 15% | $49,451 – $545,500 | $98,901 – $613,700 | $49,451 – $306,850 | $66,201 – $579,600 |
| 20% | $545,501 or more | $613,701 or more | $306,851 or more | $579,601 or more |
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How To Avoid Or Reduce Your Capital Gains Tax On Real Estate
Don’t despair if you are worrying about paying capital gains taxes after a sale. Here are five ways property owners can reduce or even eliminate their capital gains tax on real estate.
1. Satisfy The 2-In-5-Year Requirement
If you lived in the home for at least two years out of the last five years and used it as your primary residence, you meet the residence requirement for a capital gains tax exclusion. Even better, those 24 months can be spread out over the five years and don’t need to be continuous; the key is reaching a total of 24 months (730 days) of residence within that time frame.
2. Adjust Your Cost Basis
The cost basis in real estate generally starts with the purchase price of a property and includes certain settlement costs and qualifying improvements:
Purchase Price + Certain closing costs + Capital improvements – Adjustments (such as depreciation) = Adjusted cost basis
Note that some closing costs, like funds placed in escrow for future property tax payments, don’t count toward cost basis. You may also be required to subtract certain items from your cost basis as depreciation you claimed earlier.
Your purchase price, certain closing costs, and capital improvements—minus adjustments such as depreciation—determine your adjusted basis. Your adjusted basis can be used to figure out if capital gains are owed on the sale of your home.
You may need to pay capital gains tax on any profit you generate above and beyond what you initially paid for your property. Your cost basis determines what you’ll have to pay in tax when you sell. If you keep good records of the home improvements you make, you can add them to your cost basis.
Here’s an example. Say you bought your home for $300,000, including closing costs, and you spent another $40,000 to finish your basement. That brings your cost basis up to $340,000.
If you then sell your home for $840,000, you’d subtract $340,000 to arrive at a profit of $500,000. If you’re a married couple filing jointly and qualify for the primary residence exclusion (up to $500,000), this gain may be exempt from capital gains tax. Without adding those improvements to your cost basis, a larger portion of your gain could become taxable.
3. Do A 1031 Exchange
A 1031 exchange allows you to sell an investment or business property and buy another without paying capital gains taxes right away. The exchange must meet IRS rules and be a like-kind property, which means a property of the exact nature. In other words, you trade one real estate investment for another.You’ll need to follow specific IRS rules with a 1031 exchange, most of them revolving around the type of real estate involved and the number of days you have in which to complete the exchange.
It’s important to note, however, that with a 1031 exchange, you only defer capital gains taxes – you don’t get out of them completely. If there are capital gains when you sell your next real estate investment, and you’re not doing another 1031 exchange, you will have to pay capital gains tax.
4. Convert The Home Into A Primary Residence
You can convert a home into a primary residence and potentially qualify for the capital gains exclusion if you live there for at least two of the five years before selling. For example, if you own a vacation home that’s appreciated a lot in value, you could sell your primary residence, and then move into your vacation home. But keep in mind that you have to live in that house for at least two years before selling it as your primary residence in order to get the capital gains tax exclusion.
5. Sell Other Investments At A Loss
You may have stocks in your portfolio that have lost value. If you sell them for a price that’s lower than what you paid, it counts as a capital loss. You can use a capital loss to offset your real estate’s capital gains.
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Can you get a partial capital gains tax exclusion?
If you don’t qualify for a full capital gains tax exclusion, you may qualify for a partial exclusion if the reason relates to not living in your home for two full years before selling it. Some qualifying reasons include:
- A change in your place of employment
- Health problems requiring you to move
- The death of a close family member
- A divorce that leaves you unable to afford the home
- A natural disaster that makes your home uninhabitable for a period of time
It could pay to consult a tax professional or attorney to see if you’re able to qualify for a partial exclusion based on your specific situation.
The Bottom Line: Understand Capital Gains Tax Before You Sell Your Real Estate
Selling a home could leave you owing money to the IRS, so it’s essential to understand how capital gains tax on real estate works. Thankfully, there are strategies you can use to reduce your tax bill when selling a property. To better understand your specific situation, consider consulting with a tax professional for more guidance.
Maurie Backman
Maurie Backman has more than a decade of experience covering personal finance topics that include mortgages, loans, retirement, Social Security, and investing. Prior to becoming a full-time writer, she worked in the financial industry as well as in product design and marketing. Maurie holds a bachelor's degree from Binghamton University, where she studied creative writing and finance. She was happy to combine her two areas of study into a career that allows her to educate consumers on a host of financial topics.
