Did you know you could owe the IRS thousands when you sell your home? Capital gains taxes can significantly reduce your profits if you're unaware of the rules. According to IRS Publication 523 (2024), gains from a home sale can be taxed at rates up to 20% for long-term ownership or up to 37% if you've owned the property for less than one year.
If you're a U.S. homeowner or investor planning to sell property in 2025, understanding this guide is essential. In this article, you'll learn exactly how capital gains taxes work, how much you could owe, and effective strategies to reduce or even avoid these taxes.
What Is Capital Gains Tax on Real Estate and How Does It Work?
What counts as a capital gain on a home sale?
When you sell a home, any profit you make is called a capital gain. The gains tax is the tax on the difference between your home sale proceeds and what you originally paid for the property—including upgrades.
To calculate your capital gains tax on real estate, subtract your adjusted basis from the sale price:
- Adjusted basis = original purchase price
- qualifying home improvements (new kitchen, roof, etc.)
– depreciation (if it was a rental property) - real estate agent commissions, title fees, closing costs
- qualifying home improvements (new kitchen, roof, etc.)
This matters when filing your tax return for the tax year 2024. If you made a $250,000 profit on your primary residence, that may be exempt. But for investment properties, that gain could be subject to capital gains tax.
When does the IRS require you to pay capital gains tax on a home?
You’re required to report gains from selling a capital asset—like real estate—on your federal tax returns. That includes your house.
The IRS wants to know if the property:
- Was your primary residence or a rental property
- Was owned and lived in for at least two years
- Was sold within the last five years
If you meet the criteria for a capital gains exclusion, you may avoid paying capital gains on a large portion of your profit.
If not? You’re subject to capital gains on any gains and losses, reported using a tax form like Schedule D.
Further Reading: Learn to report sales of capital assets
How Much Is Capital Gains Tax on a Home Sale in 2025?
What are the 2024–2025 capital gains tax rates?
The capital gains tax rate depends on how long you owned the property and your income tax bracket for the 2024 tax year:
- Short-term capital gains: If you sell the home in under a year, it’s taxed like regular income tax, anywhere from 10% to 37%.
- Long-term capital gains: If you owned the home for more than a year, your tax rate is:
- 0% if your income is under $47,025 (single) / $94,050 (married filing jointly)
- 15% for most middle-income earners
- 20% if your income exceeds $518,900 / $583,750
Long-term assets get better rates. The key is to reduce capital gains by qualifying for exclusions or deductions.
How does your filing status or income affect what you pay?
Your individual tax situation—especially your filing status and income tax level—impacts whether you can avoid capital gains tax or how much you owe.
- Single: Can exclude up to $250,000 in gain on your primary residence
- Married filing jointly: Can exclude up to $500,000
Let’s say you bought a home for $400,000 and sold it for $700,000 after living in the home for at least two years. Your gain is $300,000.
- If you’re single, you’re taxed on $50,000
- If you’re married, you may avoid capital gains tax entirely under the capital gains tax exclusion
This is why understanding your tax bracket and filing your tax return accurately matters.
Further Reading: Learn how to minimize capital gains tax on real estate
How Can You Avoid or Reduce Capital Gains Tax on a Home Sale?
What is the IRS home sale exclusion rule?
You may qualify for the capital gains exclusion if the property was your home as your primary residence for at least two years out of the past five years before selling.
This allows you to exclude up to:
- $250,000 (single)
- $500,000 (married filing jointly)
You must have:
- Owned the home for at least two years
- Lived in a home as your main residence for two of the last five years
Exceptions apply if you had to sell a home due to military relocation, divorce, or a disability. Even a partial exclusion can reduce the capital gains you report on your 2024 tax year return.
What strategies help you legally avoid gains tax?
Here are practical ways to avoid paying capital gains or reduce your tax bill:
- Convert a rental into a primary residence
Live in it for 2 out of 5 years before you sell the home
(Just note: past depreciation won’t be excluded) - 1031 exchange
Sell an investment property and roll it into another investment property
This lets you defer the tax until the next sale - Invest in opportunity zones
Under the Tax Cuts and Jobs Act, this can offset capital gains completely after 10 years - Deduct closing costs and capital improvements
These lower your gains on a home—just keep every receipt
You can’t deduct routine repairs, but major work like a new roof or addition qualifies
What If You’re Selling a Rental or Investment Property?
What tax rules apply to rental property sales?
If you’re selling a rental property, the capital gains exclusion for a primary residence doesn’t apply. The entire profit is subject to capital gains tax.
You’ll likely pay:
- Long-term capital gains taxes: 15% or 20%, depending on your income tax
- 25% depreciation recapture tax: On the depreciation you wrote off over the years
Selling investment properties is a different ballgame—you need a plan to reduce your capital gains ahead of time.
Can bookkeeping and accounting strategies reduce your tax liability?
Yes. Here's what you or your bookkeeper should be doing:
- Track every capital improvement
These increase your basis and reduce the capital gain - Offset gains with past losses
Capital loss from another investment can reduce your overall tax liability - Document everything
Keep invoices, 1099s, settlement statements—especially if you're audited
Smart bookkeeping can save you thousands when it’s time to file your tax return.
Further Reading: Understand basics, tax rates, and assets subject to taxes
How Do You Calculate Capital Gains Tax on Real Estate?
What is your adjusted basis and why does it matter?
Your adjusted basis is the foundation for calculating capital gains tax. It reflects what you’ve put into the home—literally.
Start with your purchase price, then:
- Add: Major home improvement costs and closing costs
- Subtract: Depreciation (for rentals), plus any gains taxes on the first sale if it was part of a 1031 exchange
- Subtract: Selling costs like real estate agent fees
Capital gains tax on home sales is only owed on the difference between your sale price and adjusted basis.
What tools or help can you use to estimate your tax bill?
You can plug your numbers into a
—but that doesn’t account for depreciation, partial exclusions, or complex situations.
If you:
- Inherited a home
- Sold a rental property
- Need to claim the earned income tax credit or child tax credit too
It’s worth having a tax pro look over everything. Working with a real estate-savvy CPA or a service like Taxfyle helps reduce errors, maximize tax deductions, and keep your tax situation audit-proof.
Key Takeaways
- You may owe capital gains tax on real estate profits when you sell your home.
- The IRS allows a capital gains tax exclusion of up to $500,000 on a primary residence.
- Long-term capital gains tax rates are lower if you’ve owned the home for over a year.
- You can avoid capital gains tax by meeting the two-out-of-five-year ownership rule.
- Selling investment property is subject to gains tax on real estate and depreciation recapture.
How can Taxfyle help?
Finding an accountant to manage your bookkeeping and file taxes is a big decision. Luckily, you don't have to handle the search on your own.
At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you.
