You worked hard to become a homeowner. Now, what happens when it’s time to sell? We break down one of the biggest tax considerations you need to know.

What is the capital gains tax?

In general terms, a capital gains tax is the tax on the profit you receive when you sell a taxable asset that has increased in value. For example, if you purchased a piece of art for $2,000 and later sold it for $15,000, only the net $13,000 would be taxed.

How is the capital gains tax related to real estate?

Things get a little more complicated in the context of real estate. Depending on the type of property you’re ready to put up for sale, you’ll be subject to different regulations.


Single filers don’t owe any taxes on the first $250,000 in profit ($500,000 for joint-filing married couples). However, your primary home may or may not qualify for this exemption.

To qualify, your home must be considered a primary residence according to the Internal Revenue Service (IRS), which states that you must have been living in the home for two out of the previous five years. For instance, if you decide to sell after a year and a half because of sharp increases in value, you’ll be required to pay the capital gains tax.

Let’s say you purchased your home for $500,000 and decided to sell it after a year and a half for $850,000. You would owe tax on the $350,000 profit. In the same scenario, if you had owned the house for five years and lived there for two, you would owe $100,000 ($350,000 profit minus the $250,000 exclusion).

In both cases, the capital gains tax rate then depends on your income and filing status but will land somewhere between 0%-20%.


Because a secondary home is not considered a primary residence, it’s usually not entitled to the long-term capital gains tax exemptions. However, there are some situations in which the secondary residence could become your primary.

If you’ve spent two years, consecutively or non-consecutively, living in your secondary home, it may qualify as a primary residence. Your first home would lose primary residence status, but that could be regained once the secondary residence is sold.


Similar to the sale of your home, which doesn’t produce income, you would need to pay up to 20% in long-term capital gains taxes on the sale of a rental property depending on your income and filing status.

However, there’s one major caveat. If you’ve owned the property for less than a year, it will be considered taxable income, and you’ll need to pay the short-term capital gains tax, which can go up to 37%.

What else do you need to know?


If a divorce occurs during the ownership of the home, the person granted ownership of the home is able to count the time their former spouse lived there towards the use requirement (the 2-in-5 year rule).

Military personnel and their spouses can defer to a 2-in-15 requirement, which means that a member of the military on extended duty only needs to occupy their home for 2 out of the past 15 years to qualify for capital gains tax exclusion.


There are a couple of opportunities homeowners have to reduce their tax liability, including:

  • The 1031 Exchange: Generally speaking, investment property owners are able to put off capital gains taxes by using the sale proceeds from one property to buy another investment property.
  • Opportunity Zones: If an investment property owner invests in designated low-income communities, their gains can become tax-free after 10 years.
  • Home Expenses: Homeowners can take advantage of qualifying deductions to lower their tax burden. Some of these exemptions include home improvements and upgrades, repair costs, and closing costs.

Learn more about how the capital gains tax affects you.

We’ve gone over the basics you need to know, but the exact amount you’ll owe always depends on your unique circumstances. That’s why we offer our clients personalized tax strategy services. Together, we’ll create tax-planning strategies that minimize your tax liability so you can maximize your wealth.

Contact us today to learn how we can help you during the home selling process and beyond.