Selling Your Home Could Cost: Capital Gains Tax on Real Estate

Any financial gains from a home sale must be reported to the IRS when filing your tax return.

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Selling a home could end up costing you. That’s because capital gains taxes apply to real estate, such as your home, and are levied on profits from its sale. The tax rate depends on how long you’ve owned the house and your taxable income.

But how are these taxes determined, and are there any strategies to avoid some of them? How much could selling your home cost in taxes?

Capital Gains Tax on Real Estate

Broadly speaking, you owe capital gains tax based on the profit you make when you sell an investment or asset; this includes your home.

Your home’s capital gain is calculated by subtracting the home’s original cost or purchase price, plus any expenses incurred, from the final sale price. For example, closing costs would be an expense incurred.

Any financial gains from a home sale must be reported to the IRS when filing your tax return. For example, if you bought your home for $250,000 and sold it for $750,000, you must pay taxes on the $500,000 profit.

The capital gains tax is typically lower than ordinary income tax rates, but considering that a home is usually the largest asset many people own, this tax can add up, especially during times of inflated housing costs.

What Are Capital Gains Taxes Based On?

Capital gains tax rates are determined by three factors: your taxable income, your filing status, and the length of time you owned the property.

The IRS tax rate is 15 percent and 20 percent, depending on your income. Indicated below are the taxable income and the capital gains rates for 2024.

Tax Rate	Single	Married Filing Jointly
0 percent	$0 to $47,025	$0 to $94,050
15 percent	$47,026 to $518,900	$94,051 to $583,750
20 percent	$518,901 or more	$583,751 or more

The taxable income is adjusted annually for inflation. Below are the taxable income and capital gains rates for 2025. Note that the capital gains rate didn’t change.

Tax Rate	Single	Married Filing Jointly
0 percent	$0 to 48,350	$0 to $96,700
15 percent	$48,351 to $533,400	$533,401 to $600,050
20 percent	$533,401 or more	$600,051 or more

But there are also some general exclusion eligibilities that you can take advantage of before you pay the tax.

Primary Residence Exclusion

The IRS has a primary residence exclusion that fosters making a profit on your home. According to the IRS, joint tax filers can exclude up to $500,000 in capital gains on their primary residence, while single filers can exclude up to $250,000. Gains beyond these amounts will be taxed accordingly.

But there are restrictions on these exclusions. These are referred to as the “2 of 5” rule or the “ownership and use” test.

Who Qualifies for the Primary Residence Exclusion?

There are several ways that the IRS will deem your home eligible for the primary residence exclusion. One of them is deeming the home as the place where you spend the most time.

It must be the address you use in your official documents and with the postal service. If you own more than one home, you should conduct the IRS’s “facts and circumstances” test to ensure the home you are selling will meet the primary residence exclusion to the IRS.

To receive the exclusion, the IRS requires you to own the home for at least two years in a five-year period. This is the “2 of 5” rule. Only one must adhere to the rule if you’re married and filed jointly. And if you’ve received the house in a divorce settlement and have never lived in it, as long as your spouse adhered to the rule, you can take advantage of the exclusion.

Military members receive a pause in the 2 of 5 rule if they receive military permanent change of station (PCS) orders moving them more than 50 miles from the house.

You can’t have claimed the primary residence exclusion on another house if you’ve already sold one within the two-year period leading to the sale of the current house. In other words, you can’t claim it every year.

And, finally, you couldn’t have bought the house through a like-kind exchange.

Does the Ordinary Income Tax Rate Ever Apply?

Short-term capital gains are viewed differently. Capital gains tax rates may apply if you own the home for a year or less and then sell it. It doesn’t meet the 2 of 5 rule. The tax levied will be your ordinary income tax rate. Which, based on your income and according to the IRS, could be as high as 37 percent.

Avoid Capital Gains Tax on Your Home

The best way to avoid capital gains tax is to qualify for the primary residence exclusion.

Don’t buy and sell a house for a profit in less than a year. This is expensive since the profit will be taxed based on your ordinary income tax rate.

You must adhere to the 2 of 5 rule. If you’re a house flipper and don’t follow this rule, be prepared for taxes.

You may qualify for the exclusion if you have a taxable gain on your home’s sale and have what the IRS calls an “unforeseeable event,” such as job loss or poor health.

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