Laura reviews a legitimate way to sell your home tax-free or pay significantly less capital gains taxes.
Laura reviews a legitimate way to sell your home tax-free or pay significantly less capital gains taxes.
Money Girl is hosted by Laura Adams.
Transcript: https://money-girl.simplecast.com/episodes/selling-your-home-how-to-avoid-capital-gains-tax/transcript
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If you own a home and are considering selling it, knowing and preparing for what taxes you may owe is critical. There's even a legitimate way to pay less capital gains or skip them altogether if you follow some simple rules I'll review.
Welcome back to episode 928 of Money Girl–I appreciate you spending time with me! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, a Substack newsletter. I've brought you personal finance tips and advice weekly on this podcast since 2008, with over 44 million downloads.
You can learn more, ask questions, and sign up for the Money Stack at LauraDAdams.com. Newsletter subscribers automatically receive my Money Success Toolkit with the exact templates I use to manage money.
What is the capital gains tax?
You probably know you must pay tax when earning money from a job, business, or bank account. That type of tax is called ordinary income tax, which ranges from 10% to 37% for 2025, depending on your income and tax filing status (such as single or married filing jointly).
However, you must pay a different tax, called the capital gains tax, when you sell certain assets for a profit. For example, if you sell a capital asset, including stocks, exchange-traded funds, and real estate, for more than you paid, you have a taxable capital gain. The tax rate depends on how long you have owned the asset, your income, and your tax filing status.
If you sell a capital asset for a loss, you have a capital loss, which can offset similar gains for a period. However, if you sell a home for less than you paid, you can't claim a capital loss or deduct it from your taxable income.
READ ALSO: What’s the cheapest way to sell a home?
What is the capital gains tax on real estate?
But the good news is that you can claim a massive tax break, the capital gains tax exclusion, when you make money from a home sale. We'll review the rules and who qualifies for this terrific benefit in a moment.
But first, let's discuss how a home sale gets taxed. The rules can get complicated, but here are four steps to determine your capital gain or loss when you sell a residence.
1. Calculate your basis: This is your total investment in your property, including the purchase price, closing costs, and any capital improvements that increase its value. That could include improvements like a kitchen renovation, new windows, or floorcovering. Upgrades to your home increase your basis, which cuts your capital gain when you sell it.
Be aware that maintenance and repairs, like replacing HVAC filters and doing yard work, aren't capital improvements and don't boost your home's basis. However, certain things, like allowable depreciation and payments received for home insurance claims, decrease your home's basis. It's critical to keep good records for any significant home-related transactions.
2. Determine your realized amount: This is your home's selling price minus related expenses, including a real estate sales commission and closing costs.
3. Calculate your capital gain or loss: When you subtract your home's basis from your realized amount, you have a capital gain or loss. For instance, if your home's basis is $400,000 and you realized $450,000 from its sale, you have a $50,000 capital gain.
4. Determine your capital gains tax rate: This depends on your income, tax filing status, and how long you owned the property. For instance, if you sell a home after owning it for a year or less, you must pay short-term capital gains, which are the same as ordinary tax rates. Plus, you may owe state capital gains tax, depending on where you live.
Different rates and tax brackets apply if you sell a home after owning it for more than a year. For 2025, the long-term capital gains tax rate ranges from 0% to 20%, which is typically more favorable. That's why owning assets, like investments and your home, for longer than a year is advantageous. Plus, you may owe capital gains at the state level if yours collects it.
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How to avoid the capital gains tax when selling your home
If you have a capital gain on your home sale, you may qualify to exclude some or all of it from your taxable income. The rules are that it must be your primary residence, and you must have owned and lived in the home for at least two of the five years preceding the sale. The years don't have to be contiguous; if the periods you lived in the home add up to two years, you qualify for the gains exclusion.
The type of home doesn't matter. For instance, it could be a single-family home, townhouse, condominium, mobile home, tiny home, or even a houseboat. While you can own other real estate, like a second home, it doesn't qualify for this tax benefit.
You can claim the capital gains tax exclusion as often as you like throughout your lifetime, regardless of age. In other words, you could buy a home, live in it, sell it every two years, and claim the gains exclusion tax benefit.
How much is the capital gains tax exclusion?
If you qualify, you can exclude up to $250,000, or $500,000 if you file a joint tax return, of capital gain from selling your primary home. You don't qualify for an exclusion if you have capital gains on another piece of real estate. As previously mentioned, if you lose money because your home sells for less than you paid for it, that loss is not tax-deductible.
Previously, the IRS only allowed a home sale capital gains exclusion if you bought a more expensive home within two years of selling your old one. Plus, you could only claim an exclusion for up to $125,000 once in your lifetime if you were over 55. So, this tax benefit has gotten much better over time.
If you're a widow or widower who doesn't remarry before selling your home within two years after your spouse's death, you generally qualify to exclude up to $500,000 in gains as if your spouse were still alive.
LISTEN ALSO: Will renting or owning a home make you wealthier?
Example of the capital gains tax exclusion
Let's say you're single and pay $350,000 for a home. You make renovations and have an adjusted basis of $400,000 when you sell the property in five years. If you realize $450,000 on the sale, you have a capital gain of $50,000 ($450,000 - $400,000). Since you qualify for a $250,000 tax exclusion, you'd owe zero taxes on the sale of your home.
Or, you could be married, file taxes jointly, and pay $350,000 for a home you live in for 30 years. After several significant renovations over the decades, your adjusted basis is $600,000. If you sell the property and realize $1.2 million, you'd have a capital gain of $600,000 ($1.2 million - $600,000). If you qualify, you can exclude $500,000, leaving you with a $100,000 long-term capital gain.
There's a worksheet in IRS Publication 523, Selling Your Home, that you can use to figure out your home's basis and any gain you can exclude. If you can exclude all your home's gain, you don't have to report it on your tax return because the entire transaction is tax-free!
If you have a taxable home gain, you must report the sale or exchange of your property on Form 1040, Schedule D, Capital Gains and Losses, and Form 8949, Sales and Other Dispositions of Capital Assets. As I mentioned, if you sell other properties, not your main home, you must pay capital gains tax on all your profits.
Note that there are exceptions where you qualify for the gains tax exclusion even if you sell your home before living in it for two of the previous five years, such as:
Serving in the military or Foreign Service.
In addition, you may qualify for a partial gain exclusion if you sell your home before living in it for two years due to a change in your health, workplace location, or having various unforeseeable events as described in IRS Publication 523.
This list isn't complete. There may be other situations when you're eligible or ineligible for the home sale capital gains tax exclusion, so speak with a certified public accountant about paying taxes after selling your home. With some planning, correctly timing your sale and qualifying for the gains exclusion could be one of the biggest tax breaks you ever get.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Brannan Goetschius is our director of podcasts, Holly Hutchings is our digital operations specialist, Morgan Christianson is our advertising operations specialist, and Nathaniel Hoopes is our marketing contractor.