What Is Capital Gains Tax?
Getting To Know Real Estate Capital Gains Tax
Besides being fulfilling, homeownership can be a great investment. This is true even if it is a major financial commitment. Homeowners pay a monthly mortgage, insurance, utilities, and the cost of any repairs. They may also pay what’s called a capital gains tax when they sell the home.
A capital gains tax is a tax on the profits from selling a large investment. Understanding this tax can help homeowners make the most from selling their home.
Capital Gains Tax on Real Estate
Large investments are called capital assets. They include real estate, stocks and bonds, cars, artwork, and even cryptocurrency. When you sell a capital asset, you pay capital gains taxes on the money you make from that sale.
Selling a home does cost money, but generally, these costs come out of your profits. For example, your profits will be the difference between the original purchase price and the selling price minus any closing costs and agent commissions. The capital gains tax is a percentage of those profits, also known as the proceeds.
The capital gains tax rate (a percentage) depends on several factors such as how long you’ve lived in your home and your household income. A qualified tax specialist can help you understand your situation, but you can get started with some basics around how capital gains tax works and what you should expect.
How the Capital Gains Tax Works
Capital gains taxes are a percentage of your total profit on the sale of your home. That percentage, the tax rate, primarily depends on how long you’ve lived in your house. The time you’ve owned your home falls into two categories: long-term and short-term.
What Are Long-Term Capital Gains?
Long-term capital gains tax rates apply when you’ve owned your home for more than one year and used it as your primary residence. These rates are typically 0%, 15%, or 20%, depending on your filing status and total household income as reported on your federal tax return.
There are five filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying surviving spouse. For long-term capital gains, each of these statuses is then broken down into the three tax rates based on household income. See how income affects tax rates for 2025:
| Rate | Single | Married filing jointly or qualifying surviving spouse | Married filing separately | Head of household |
|---|---|---|---|---|
| 0% | Up to $48,350 | Up to $96,700 | Up to $48,350 | Up to $64,750 |
| 15% | $48,351 to $533,400 | $96,701 to $600,050 | $48,351 to $300,000 | $64,751 to $566,700 |
| 20% | Over $533,400 | Over $600,050 | Over $300,000 | Over $566,700 |
What Are Short-Term Capital Gains?
Short-term capital gains are when you own your home for a year or less. People who sell their home in this time frame would pay taxes at their normal federal tax rate. See the table for the 2025 tax brackets.
| Rate | Single | Married filing jointly or qualifying surviving spouse | Married filing separately | Head of household |
|---|---|---|---|---|
| 10% | Up to $11,925 | Up to $23,850 | Up to $11,925 | Up to $11,925 Up to $17,000 |
| 12% | $11,926 to $48,475 | $23,851 to $96,950 | $11,926 to $48,475 | $17,001 to $64,850 |
| 22% | $48,476 to $103,350 | $96,951 to $206,700 | $48,476 to $103,350 | $64,851 to $103,350 |
| 24% | $103,351 to $197,300 | $206,701 to $394,600 | $103,351 to $197,300 | $103,351 to $197,300 |
| 32% | $197,301 to $250,525 | $394,601 to $501,050 | $197,301 to $250,525 | $197,301 to $250,500 |
| 35% | $250,526 to $626,350 | $501,051 to $751,600 | $250,526 to $375,800 | $250,501 to $626,350 |
| 37% | Over $626,350 | Over $751,600 | Over $375,800 | Over $626,350 |
Capital Gains Tax Exclusions
The capital gains tax has some exclusions that may help reduce how much you owe when selling your home. One common example is the primary residence exclusion. With this example, if you lived in your home as your main residence for at least two of the past five years, you could qualify for an exclusion of up to $250,000 of profit as a single filer, or up to $500,000 if married and filing jointly.
Other exclusions or special circumstances may also apply, depending on your situation. Remember, talking to a tax professional can help you understand your options.
How To Calculate Capital Gains Tax
Capital gains tax follows a formula to see how much profit you make from selling your house. Here’s how you can figure it out:
Capital Gains Tax = (Net Selling Price – Adjusted Basis) × Your Capital Gains Tax Rate
Net selling price: The final sale price of your home minus selling costs, such as real estate agent commissions, closing costs, and other transaction fees.
Adjusted basis: The original purchase price of your home plus the cost of major home improvements (such as a new roof or kitchen remodel), minus any depreciation if you used part of your home for business or rental purposes.
| Capital Gains Tax Calculation Example |
|---|
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Let’s say you bought your home for $200,000 and spent $50,000 on qualified home improvements. You sold your home for $500,000, after deducting commissions and closing costs. Your long-term capital gains tax rate is 15%.
Keep in mind: You may qualify for the capital gains exclusion if the home was your primary residence for at least two of the past five years. With this example, the entire $250,000 gain could be tax-free whether you’re a married or single filer. |
Capital Gains Tax FAQs
Here are answers to some common questions you may have about the capital gains tax:
Can Home Improvements Reduce Your Taxable Proceeds?
Some home improvements can lower the amount of taxable profit if they extend the life of the house or improve its usability. These improvements may include:
- Finishing the basement
- Adding a bedroom or other room
- Building a garage
- Significantly remodeling a room, like your kitchen or bathroom
- Adding energy-efficient windows or air conditioning
Do States Have Capital Gains Tax on Real Estate?
Yes, most states have capital gains tax, in addition to the federal capital gains tax. However, these states do not:
- Alaska
- Florida
- Missouri
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Wyoming
States that do have capital gains tax may have lower rates than the federal capital gains tax rate. Check with a tax professional or with your state’s revenue department to find out what your state’s rate is.
Final Thoughts on Capital Gains Tax
Capital gains tax on real estate is a consideration if you plan to sell your home. Of course, not everyone will have to pay, depending on their circumstances and available exclusions. Before selling a home, you may want to talk to a qualified tax professional. If you’re planning on buying a new home after selling, you can get prequalified here.
Freedom Mortgage Corporation is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Consult a financial advisor before making important personal financial decisions, and consult a tax advisor regarding tax implications and the deductibility of mortgage interest and charges.
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