Selling Your Home? Here’s How Capital Gains Taxes Work

Selling Your Home? Here’s How Capital Gains Taxes Work

Selling your home can be a big financial milestone, and for many homeowners, it means walking away with a significant profit. But before you put your home on the market, it’s important to understand how capital gains taxes could impact your bottom line. These taxes apply to the profit you make when selling a property, and while the IRS offers generous exclusions for primary residences, there are specific rules you need to know. From eligibility requirements to calculation methods and potential exceptions, understanding the basics can help you plan ahead and avoid surprises at tax time.

What Is Capital Gains Tax on Your Home Sale?

Capital gains tax applies to the profit made from selling a capital asset—like your home. The capital gain is the difference between your home's sale price and its adjusted basis, which is your original purchase price plus allowable adjustments (e.g., major improvements), minus selling costs such as commissions and closing fees. Here’s the good news- most homeowners can qualify for a major tax break.

Short-Term vs. Long-Term Capital Gains

The IRS treats profits from selling your home differently depending on how long you’ve owned it. If you sell your home within one year of buying it, the gain is considered short-term and taxed at your ordinary income tax rate, which can range from 10% to 37%. If you’ve owned the home for more than a year, the gain is considered long-term, and you’ll benefit from lower capital gains tax rates.

For 2026, the long-term capital gains rates are:

  • 0% if your taxable income is up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).

  • 15% if your income falls between $49,451 and $545,500 (single), $98,901 and $613,700 (married filing jointly), or $66,201 and $579,600 (head of household).

  • 20% if your income exceeds those limits.

Capital Gains Tax Exemptions

The good news? Most homeowners don’t pay capital gains tax when selling their primary residence thanks to the Section 121 exclusion. If you meet these requirements:
  • The home is your primary residence
  • You’ve owned it for at least two years
  • You’ve lived in it for at least two of the past five years
  • You haven’t claimed this exclusion in the past two years
You can exclude up to $250,000 of profit if you’re single, or $500,000 if you’re married and filing jointly. For example, if you bought a home for $200,000 and sold it for $500,000, your gain is $300,000. If you’re single, $250,000 of that is tax-free, and you may owe tax on the remaining $50,000. If you don’t meet all the requirements, you might still qualify for a partial exclusion. Always check with a tax advisor to verify your exclusion status.

What About Investment Properties?

If you’re selling an investment property, you won’t qualify for the primary residence exclusion. However, you may be able to defer taxes through a 1031 exchange, which allows you to reinvest the proceeds into another investment property of equal or greater value. To complete a 1031 exchange, you must go through a qualified intermediary who will hold the funds and facilitate the transaction. There are strict timelines: you have 45 days to identify the new property and 180 days to close. Missing these deadlines can result in a hefty tax bill.

Ready to Make Your Next Move?

Understanding capital gains taxes is just one piece of the puzzle when selling your home or investment property. Whether you’re planning to buy, sell, or refinance, having the right mortgage strategy can make all the difference. At TowneBank Mortgage, we’re here to guide you every step of the way—helping you maximize your financial opportunities and achieve your goals.

TowneBank Mortgage is not a tax consultant. Always consult a qualified tax advisor for personalized guidance.
 

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