Capital Gains Tax on Home Sales: What Sellers Need to Know

Capital gains tax is one of the most overlooked costs in a home sale. For homeowners who have seen significant appreciation, the tax bill can be tens of thousands of dollars — or zero, depending on your situation.

The primary residence exclusion allows you to exclude up to $250,000 in capital gains ($500,000 for married couples filing jointly) if you have lived in the home as your primary residence for at least 2 of the last 5 years. This is the single most valuable tax benefit for homeowners.

Your cost basis is your original purchase price plus the cost of qualifying improvements. Kitchen remodels, room additions, new roofs, and other capital improvements all increase your basis and reduce your taxable gain. Keep records of all improvements.

If your gain exceeds the exclusion, the taxable portion is taxed at long-term capital gains rates: 0% for the lowest tax brackets, 15% for most taxpayers, and 20% for high earners. Additionally, a 3.8% Net Investment Income Tax (NIIT) may apply for higher incomes.

State capital gains taxes vary significantly. States like California, New York, and New Jersey have rates above 10%, while states like Texas, Florida, and Washington have no state income tax. Your state can significantly affect your after-tax proceeds.

Use the NetProceeds Pro TaxMap tool to calculate your specific capital gains tax liability based on your purchase price, improvements, filing status, and state.