How Much Will I Pay in Capital Gains Tax on a Home Sale?

Uncle Sam could take a bite out of the profit you make when selling your home. The thing is, he likely won’t — most home sales fall under large exemptions. Here’s how the capital gains tax on a home sale works, and how you can keep the most dollars in your pocket.

What is a capital gains tax on a home sale?

Similar to how states can charge a sales tax based on how much you pay in a transaction, a capital gains tax can charge you a percentage based on the profit you make (if any) when you sell your home. The tax rate is 0%, 15% or 20%, depending on your tax bracket.

Exemptions from the Taxpayer Relief Act of 1997, however, let most homeowners off the hook. If you lived in a property for at least two of the previous five years:

• You don’t have to pay capital gains taxes on the first $250,000 of profit if you file taxes as a single person.
• You don’t have to pay capital gains taxes on the first $500,000 of profit if you file taxes as a married person.

How does the capital gains tax work?

If you do have to pony up for the capital gains sales tax, here’s generally what you can expect to pay based on your taxable income:

• 0% if your taxable income is less than or equal to $40,400 as a single person; $80,800 if you’re married and filing jointly or you’re a qualifying widow(er).
• 15% if your taxable income falls between:
  • $40,400 and $250,800 if you’re married filing separately.
  • $40,400 and $445,850 as a single taxpayer.
  • $80,800 and $501,600 if you’re married filing jointly or a widow(er).
  • $54,100 and $473,750 for head of household.
• 20% if your taxable annual income exceeds the above limits.

When is a home sale fully taxable?

A home sale is fully taxable if you haven’t lived in the home for the required time — you have to have used the home as your primary residence for a full two out of the last five years.

There are exceptions to this that could be to your benefit. For example:

• If you or your spouse were on official, extended duty in the military, foreign service or intelligence community, you may be eligible to suspend the five-year test for up to 10 years.
• If you have become unable to care for yourself and now live in a care facility like a nursing home, you only need to have lived in your home for one out of the last five years.

A second home you sometimes lived in as your main home could still meet the primary residence requirement, but an established income property, a home you flipped or a business property may not.

A capital gains tax example

Imagine you make $300,000 in profit from selling your primary home that you’ve lived in for the last three years and you file taxes as a single, unmarried person. You qualify to exclude the first $250,000 of the profit, but you’ll have to pay taxes on the remaining $50,000. Your taxable income is $90,000 in the same year you sell your home, so your tax rate is 15%. You’ll pay an estimated $7,500 in capital gains tax.

Can you avoid or reduce the capital gains tax on a home sale?

You may be able to reduce your taxable income — and thus change your tax bracket — if some of the following applies to you:

• You made substantial home improvements.
• You operated a home business.
• You bought a house or paid home mortgage interest.
• You have deductible medical expenses.
• You purchased a car.