What is the Section 121 exclusion?

This tax rule allows single filers to exclude up to $250,000 of capital gains and married couples filing jointly to exclude up to $500,000, provided they have lived in the home as their primary residence for at least 2 of the last 5 years.

Can I deduct home improvements?

Yes! The cost of capital improvements (like a new roof, kitchen remodel, or adding a deck) increases your 'cost basis'. A higher cost basis means a lower taxable gain when you sell.

What if I lived there for less than 2 years?

Generally, you won't qualify for the full exclusion. However, you might qualify for a partial exclusion if the sale was due to a change in health, place of employment, or unforeseen circumstances.

Real Estate Capital Gains Tax: Keep Your Profit

You sold your house for a profit. Congratulations! Now, Uncle Sam wants his cut. Here is how to legally minimize (or eliminate) that tax bill.

Estimate Your Tax

See how much capital gains tax you might owe.

Tax Calculator

Step 1: Determine Your Cost Basis

You are taxed on the gain, not the sale price. To find the gain, you first need your basis:

Basis = Purchase Price + Purchase Costs + Improvements

Example: Bought for $300k, paid $5k in closing costs, and spent $50k on a new kitchen. Your basis is $355,000.

Step 2: Calculate Your Net Proceeds

This is what you walk away with after selling expenses.

Net Proceeds = Sale Price - Selling Costs (Agent Fees, Closing Costs)

Example: Sold for $600k, paid $36k in agent fees. Net proceeds are $564,000.

Step 3: Calculate the Gain

Gain = Net Proceeds ($564k) - Basis ($355k) = $209,000

Step 4: The Exclusion (The Golden Rule)

If it was your primary residence for 2 of the last 5 years:

Single: First $250k of gain is tax-free.
Married Joint: First $500k of gain is tax-free.

In our example, the $209,000 gain is fully tax-free!

Investment Property Rules

If you rented the house out, you don't get the exclusion (unless you lived there recently). You will likely owe 15% or 20% in Long Term Capital Gains tax, plus "Depreciation Recapture" tax (which is taxed at 25%). This is where ROI calculations become critical.