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Capital Gains Tax on Home Sale – Selling your home can be a significant financial event, especially when considering the potential impact of capital gains tax. For many homeowners, the profit from a home sale—known as a capital gain—may be partially or fully excluded from taxes under IRS rules. This article explores the key aspects of capital gains tax on home sales for the 2025 and 2026 tax years, including eligibility for exclusions, applicable tax rates, calculation methods, and tips to minimize your tax liability. We’ll draw from trusted sources like the IRS to ensure accuracy.
What is Capital Gains Tax on Home Sales?
Capital gains tax is a federal tax on the profit you make from selling an asset, such as your home, that has increased in value. For home sales, this typically applies if you’ve owned the property for more than one year, qualifying it as a long-term capital gain. Short-term gains (from assets held one year or less) are taxed at ordinary income rates, but most home sales fall into the long-term category.
The good news for primary residence sellers is the Section 121 exclusion, which allows you to exclude up to $250,000 in gains if you’re single or $500,000 if married filing jointly. This exclusion has remained unchanged for 2025 and 2026, despite discussions in recent legislation like the One, Big, Beautiful Bill, which introduced other tax adjustments but did not alter home sale exclusions.
Eligibility for the Home Sale Exclusion
To qualify for the full exclusion under Section 121, you must meet specific IRS tests outlined in Publication 523:
- Ownership Test: You must have owned the home for at least 24 months (not necessarily consecutive) out of the five years leading up to the sale. For joint filers, only one spouse needs to meet this.
- Use Test: The home must have been your principal residence for at least 24 months out of the prior five years. Both spouses must meet this for the $500,000 exclusion.
- Frequency Limit: You can’t have claimed the exclusion on another home sale in the two years before this sale.
Exceptions exist for partial exclusions if the sale is due to job relocation (more than 50 miles), health issues, or unforeseen circumstances like divorce or natural disasters. Special rules apply to military personnel, surviving spouses, and those with disabilities, potentially extending the five-year period or allowing higher exclusions.
If your gain exceeds the exclusion amount, the excess is subject to long-term capital gains tax. Note that any depreciation claimed on the home (e.g., for a home office) is recaptured at a 25% rate and cannot be excluded.
Long-Term Capital Gains Tax Rates for 2025 and 2026
If your home sale gain isn’t fully excluded, you’ll pay long-term capital gains tax at rates of 0%, 15%, or 20%, depending on your taxable income. These brackets are adjusted annually for inflation.
For the 2025 tax year (filed in 2026):
- 0% rate: Up to $48,350 for singles; $96,700 for joint filers.
- 15% rate: $48,351 to $600,050 for singles; $96,701 to $600,050 for joint filers (wait, correct from sources: actually, 20% starts at $600,050 joint).
- 20% rate: Above those thresholds.
For the 2026 tax year (filed in 2027):
- 0% rate: Taxable income up to $49,450 for singles; $98,900 for married filing jointly.
- 15% rate: $49,451 to $545,500 for singles; $98,901 to $613,700 for joint filers.
- 20% rate: Above $545,500 for singles; above $613,700 for joint filers.
High-income earners may also face a 3.8% Net Investment Income Tax (NIIT) on gains if modified adjusted gross income exceeds $200,000 (single) or $250,000 (joint).
Here’s a visual breakdown of the 2026 long-term capital gains brackets:
| Filing Status | 0% Rate Threshold | 15% Rate Up To | 20% Rate Starts At |
|---|---|---|---|
| Single | $0 – $49,450 | $49,451 – $545,500 | $545,501+ |
| Married Filing Jointly | $0 – $98,900 | $98,901 – $613,700 | $613,701+ |
| Head of Household | $0 – $66,200 | $66,201 – $579,600 | $579,601+ |
| Married Filing Separately | $0 – $49,450 | $49,451 – $306,850 | $306,851+ |
How to Calculate Your Capital Gain on a Home Sale
To determine if you owe capital gains tax:
- Find Your Adjusted Basis: Start with your original purchase price, add improvement costs (e.g., renovations), and subtract any depreciation or casualty losses.
- Calculate the Gain: Subtract the adjusted basis and selling expenses (e.g., agent commissions, closing costs) from the sale price.
- Apply the Exclusion: If eligible, subtract up to $250,000/$500,000.
- Tax the Remainder: Apply the appropriate long-term rate to any excess gain.
Example: A single filer buys a home for $300,000, spends $50,000 on improvements, and sells for $600,000 with $30,000 in selling costs. Adjusted basis = $300,000 + $50,000 = $350,000. Gain = $600,000 – $350,000 – $30,000 = $220,000. After $250,000 exclusion, taxable gain = $0.
Report the sale on Schedule D (Form 1040) and Form 8949 if there’s a taxable gain. If fully excluded, you may not need to report it unless you receive a Form 1099-S.
Special Considerations for 2025 and 2026
- Mortgage Debt Forgiveness: If part of your home loan is forgiven (e.g., in a short sale), it may be excluded from income if the debt was discharged before January 1, 2026, or agreed upon in writing before then.
- Investment Properties: No exclusion applies; gains are fully taxable, with potential 1031 exchanges to defer taxes.
- Surviving Spouses: Can claim the $500,000 exclusion if selling within two years of a spouse’s death, provided other tests are met.
- Recent Legislation: The One, Big, Beautiful Bill (signed July 2025) adjusted inflation figures and other provisions but preserved the home sale exclusion. Proposals to eliminate capital gains tax on homes were discussed but not enacted.
Tips to Minimize Capital Gains Tax on Your Home Sale
- Track Improvements: Keep records of all capital improvements to increase your basis and reduce gain.
- Time Your Sale: Ensure you meet the two-year residency rule to maximize the exclusion.
- Deduct Selling Costs: Agent fees, staging, and legal expenses directly reduce your gain.
- Consider a 1031 Exchange: For non-primary homes, defer gains by reinvesting in similar properties.
- Consult a Professional: Tax advisors can help navigate complex situations, especially with high gains or special circumstances.
For most homeowners, the capital gains tax on home sales in 2025 and 2026 can be minimized or avoided entirely through the Section 121 exclusion. With inflation-adjusted brackets and no major changes to the rules, planning ahead is key. Always consult the latest IRS guidelines or a tax professional for personalized advice, as individual circumstances vary. By understanding these rules, you can make informed decisions and potentially save thousands on taxes.