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Capital gains tax on real estate: How much you'll pay when you sell a home
Getting a great price for your home can feel like quite the win — but when it comes time to file taxes, you might feel differently.
That’s because you could owe capital gains taxes. This is a separate tax for profits made off certain investments. Depending on how long you owned the home and various other factors, these taxes can reach up to 20% of the profit from your sale, adding a hefty amount to your annual tax bill.
Fortunately, there are ways to reduce your capital gains taxes or even avoid them altogether. Are you planning to sell a home soon? Here’s what you can expect for capital gains taxes — and how to plan ahead.
Dig deeper: How much does it cost to sell your house?
In this article:
What is the capital gains tax on real estate?
A capital gain is a profit you make off an investment. So, if you sell your house for more than you initially paid for it, that’s considered a capital gain.
The Internal Revenue Service charges a separate tax for these types of profits in addition to those you’ll pay on your regular taxable income. We’ll go more into the exact numbers later, but generally speaking, you’ll pay anywhere from 0% to 20% on your home sale profits.
Learn more: What is taxable income?
When do you pay capital gains tax on real estate?
You’ll owe capital gains taxes when selling a home you’ve owned for more than one year. (According to the IRS, you can start counting from the day after you acquired the house until the day you sold it.)
The payment won’t actually come due until you file your tax returns the following year, though. So, if you sold a home in 2024, you won’t pay the capital gains tax until you file your 2024 return in April 2025. You’ll use a Schedule D form to report your capital gains.
There are some scenarios when you may not owe capital gains taxes — for example, if you didn’t own the home very long or earn less than a certain income threshold. You also may qualify for a capital gains tax exclusion, which we’ll go into further down.
Dig deeper: Is now a good time to sell your house?
How much is capital gains tax on real estate?
The cost of capital gains taxes depends on three main factors: How long you held the property before selling it, your total taxable income in the year you sold it, and how you file your taxes (e.g., filing as a single taxpayer versus jointly with your spouse).
Let’s look at all three factors:
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Length of time holding the property: Capital gains are classified as either short-term or long-term. If you have an asset for over a year, the gain is long-term and taxed at the IRS’s capital gains tax rates below. If it’s less than one year, it’s considered short-term capital gains and taxed based on your ordinary income tax bracket.
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Taxable income: Capital gains tax rates vary by how much you make per year, with homeowners with lower annual incomes paying 0% and those with higher incomes paying 15% to 20%.
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Filing status: Income thresholds vary by filing status within each capital gains tax bracket. Single filers and married couples filing separately have the lowest income thresholds, while those married and filing jointly have the highest.
See the table below for a breakdown of what you’ll pay in capital gains taxes for the tax year 2024:
Capital gains taxes will rise slightly for the 2025 tax year, which you will file in 2026. See these thresholds below:
Dig deeper: How to choose the right federal tax filing status
Calculating your capital gains tax
You only owe capital gains taxes on the profits from your home sale. To calculate how much you owe, you’d first find your capital gains tax bracket on the above chart (make sure to use the year you sold the home). Then, you’d multiply that by your total profit.
For example, if you’re in the 15% bracket, bought your home for $550,000, and the sale price was $900,000, your taxes would look like this:
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Total capital gain: $450,000 (900,000 - 550,000)
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Total capital gains tax owed: $67,500 (450,000 x 0.15)
In the above example, you’d owe $67,500 in real estate capital gains taxes for 2024.
How to avoid capital gains tax on real estate
There are several ways to reduce capital gains taxes or even avoid them altogether. Here are some options.
Capital gains tax exclusion
When selling your house, the best way to avoid capital gains taxes is to use the IRS’s capital gains tax exclusion. This exempts you from paying capital gains taxes on up to $500,000 of capital gains on a home sale (if you’re married filing your taxes jointly) or $250,000 (for other taxpayers) — but only if you meet specific requirements.
To qualify, you must have owned and used the property as your residence for at least two years (730 days) out of the last five. Also, the sale must be of your “main home,” which the IRS says is the address you use for the U.S. Postal Service, on your voter registration card, on your tax returns, or on your driver’s license and car registration.
Note: There are quite a few special exceptions and rules regarding this exemption, so make sure you go through the IRS's step-by-step guide or speak with a tax advisor to determine if you qualify. You may also qualify for a partial exclusion in some situations.
Reduce your taxable income
If your income is below a certain threshold, you may fall into the 0% capital gains tax bracket, exempting you from paying capital gains taxes on any profit you earn from your home’s sale.
To do this, you can:
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Max out your 401(k) contributions, as these contributions won’t qualify as taxable income
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Make charitable donations, which are deductible up to a certain threshold
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Contribute to your Health Savings Account (HSA) if you have one, as these contributions are tax-deductible
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Find additional tax deductions you may be eligible for
Tax deductions reduce your taxable income, and many are available — including ones for mortgage interest, property taxes, and home office costs. Remember that taking these means itemizing your deductions, or writing off these costs one by one. Taking the standard deduction (a single, lump-sum deduction) offers the most annual savings for many taxpayers. Consult a tax professional to determine which method is best for your tax returns and learn about other tax deductions you might qualify for.
Dig deeper: Should you take the standard or itemized tax deduction?
Use a 1031 exchange
If you rent your property out or use it for business purposes, you have another option: A 1031 exchange. This is a type of swap in what the IRS calls “like-kind” properties and assets, allowing you to take one asset (or the proceeds from that asset’s sale) and then reinvest those into a similar asset within a certain time period, essentially deferring your capital gains taxes until later on. The 1031 is for business and investment properties, not primary residences.
If you opt for this strategy, make sure you consult a 1031 specialist, as they can be complicated transactions.
Get professional help
If you’re looking to minimize the taxes you pay on your upcoming home sale, speak to a local tax professional in your area. They can help you estimate what taxes you will owe, as well as how you can reduce or even eliminate them altogether, if possible.
Home sale capital gains tax FAQs
Do you pay capital gains for selling a house?
You might pay capital gains taxes when you sell a house, but it depends on your total annual income, tax filing status, and how long you owned the home. Many homeowners qualify for an exclusion that exempts them from some or even all of the capital gains taxes on their home sale.
How are capital gains taxes calculated on the sale of real estate?
Capital gains taxes are based on your income, tax filing status, sales profits, and the time you had the property. If you had the home for less than one year, your sale profits will be taxed at your ordinary tax rate.
How do you avoid capital gains on real estate?
To avoid paying capital gains taxes when selling real estate, you can use the capital gains tax exclusion (if eligible), sell the home through a like-kind 1031 exchange, or reduce your taxable income.
This article was edited by Laura Grace Tarpley.
