I’m always surprised when I talk to people who have owned a home for maybe decades but have no clue what their tax responsibility will be if they sell that property. No one wants to think about giving money to the federal government so they don’t, but not preparing for the day you sell your home could be one of the biggest mistakes of your financial life.
Let’s start with what exactly a capital gain is. Capital gains is a tax on the profit you make from an asset such as stocks, real estate or other investments. For the purpose of this column, we’re going to talk about capital gains on real estate. Since not all real estate is created equal, it’s important to define your real estate holding, with the most standard ones being a primary home, secondary home or investment property.
Secondary homes and investment properties are best discussed with tax preparers who specialize in this area. However, most of us own a home that we live in, called our primary residence, and the federal government has tax exclusions available to homeowners when they sell their primary home. This doesn’t mean you should not seek out professional advice.
Since 1997, homeowners can reduce taxes on the sale of their primary property that you have owned for two out of the five years leading up to the sale. The IRS allows single taxpayers to exclude $250,000 of gain and married taxpayers filing jointly to exclude $500,000. According to LendingTree, American households are sitting on $34.5 trillion in home equity in the first quarter of 2025. A good portion of these funds will be faced with tax bills upon sale of the property, so it’s vital that homeowners understand their potential tax liability.
There is a way to further reduce the capital gains on your primary home by adjusting the basis of your home. Your home’s basis is generally calculated by adding the cost of capital improvements to the price you paid when you acquired your home. For instance, if you replaced your roof or remodeled your kitchen, those costs are considered capital improvements, and should be added to the price you paid for your house, thus reducing your capital gains liability.
There are two other ways to reduce your capitals gains liability but they will only appeal to a small percentage of homeowners. If you can afford to finance the sale of your home, that will save you capital gains. Or converting your property to a business property will give you the ability to dispose of the property via a 1031 like-kind exchange at a future date.
There is an act introduced by Rep. Marjorie Taylor Greene identified as “No Tax on Home Sales Act” (HR 4327). The bill aims to eliminate federal capital gains taxes on the sale of primary residences. Keep in mind if you reside in a state that has state capital gains requirements, you would still be responsible for paying capital gains based on your state’s requirement. States like Florida without a state tax will pay no capital gains on the sale of a primary home. President Donald Trump has taken an interest in this bill, which his administration considered in July.
Study up on capital gains if you’re within a few years of selling your primary home. Hopefully, you kept all of the receipts that would be considered a capital improvement, and start thinking about the capital gains you may be heading for.
