For most homeowners, selling the family home produces no capital gains tax at all - thanks to one of the most generous breaks in the code, the Section 121 exclusion. But the details matter.
The exclusion
| Situation | Gain you can exclude |
|---|---|
| Single, main home, 2-of-5-year test met | $250,000 |
| Married filing jointly, both meet the use test | $500,000 |
| Second / vacation home | $0 |
| Rental property | $0 (plus depreciation recapture) |
To qualify you must have owned the home and lived in it as your main home for at least two of the five years before the sale (they need not be consecutive), and you generally cannot use the full exclusion more than once every two years.
When you actually owe
You owe capital gains tax only on the gain above the exclusion. A couple with a $700,000 gain excludes $500,000 and pays long-term tax on the remaining $200,000 - at 15% or 20% depending on income, plus the 3.8% NIIT if their income is high, plus any state tax.
Two groups commonly owe: long-time owners in hot markets whose gain exceeds the cap, and owners of second homes or rentals (no exclusion). Rentals also face depreciation recapture at up to 25% - see collectibles and Section 1250.
Lower your taxable gain
Your gain is sale price minus cost basis - and basis includes capital improvements (a new roof, an addition, a renovation). Keeping receipts can shave tens of thousands off a taxable gain. More on the math in how to calculate capital gains tax and the home-sale page.
General information, not tax advice. Verify with the IRS or a tax professional.