How Capital Gains May Impact Real Estate Decisions

The real estate market has been kind to homeowners over the past fifteen years. It’s been so kind, in fact, that many long-term owners are analyzing payoff statements and home values as if watching Yamine Lamal dribbling inside from the right corner of the penalty box. Because of their growing equity, they’re now facing the possibility of paying tax on capital gains.

Capital gains tax is a tax one pays on any asset that makes a profit, whether it’s stocks, bonds, or real estate. There are two types of capital gains: short-term and long-term. Short-term capital gains are profits from selling assets held within a year or less. Long-term gains are from profits of assets held longer than a year.

Because short-term capital gains are taxed at normal income rate and long-term gains are taxed at a capital gains tax rate, which is lower, it makes more sense to hold onto an asset for a longer period of time. When it comes to real estate, homeowners will need to consider how capital gains influence their profits, especially if they are short-term investors.

However, there are several exclusions.

The IRS highlights a few main exclusions. “If you have a capital gain from the sale of your home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.” (irs.gov)

This is what’s known as a Section 121 exclusion. In order to meet this exclusion, the owner must meet two criteria:

“You have owned and used your home as your main home for an aggregate of at least two years out of the five years prior to the date of sale. Any two-year period within the five-year window qualifies, and one would not qualify if the exclusion were used on another home in the same time period.” (irs.gov)

For the year, 2025, the rate of capital gains for someone filing as single would be as follows:

 For a married couple, filing jointly:


For a married couple, filing single:

For head of household:

How to calculate capital gains:

1) Determine your basis. The basis includes the price of the purchased home plus any renovations. For example, if someone purchased a home for $500,000 and put $50,000 in to update the home, their basis would be $550,000.

2) Calculate the sale price minus sale costs. If the home sold for $750,000 several years later and the seller paid $30,000 in selling fees, the sale price is $720,000.

3) Find your gain. Subtract the basis from the sale price. If the sale price is less than the purchased price, the sellers nets a loss. In this example, the gain would be $170,000.

4) Adjust for the exclusion. If you are eligible for an exclusion, reduce the capital gain by $250,000 (if filing single) or $500,000 (if filing jointly). In this example, the taxable gain would be $0.

There are a number of additional exclusions and disqualifications. Here are a few of the more common ones, but it’s still important to speak with your tax advisor prior to listing your home to plan ahead. If you’ve recently sold your home, make sure you discuss the potential for taxable gains during the next filing period.

Some exclusions (mentioned in more detail in IRS publications):

Divorce or separation:

Death of a spouse

Member of the Uniformed Services, Foreign Service, the intelligence community, or Peace Corps

Home destroyed or condemned

Vacant land

Work-related move

Health-related move

Or

1031 Like Exchange (If you sell a home but use the profits to purchase a new one, this is considered a like-kind exchange. Profits from the sale can be excluded from capital gains tax, however, when the property is sold again, the profit will be subject to tax.)

More details can be found at:

https://www.irs.gov/publications/p523