RESOURCE: PRIMARY HOME SALE CAPITAL GAIN EXCLUSION

THE PRIMARY HOME

CAPITAL GAIN TAX EXCLUSION

in plain English

What Is It?

When you sell your primary home, you may be able to exclude a significant portion of the profit from taxes, thanks to IRS Code Section 121. If you've owned and lived in the home for at least two out of the last five years, you can exclude:

>> Up to $250,000 of profit if you're single

>> Up to $500,000 if you're married and filing jointly

Any profit above these limits is taxed at long-term capital gains rates.

Why Your Home’s Tax Basis Matters

Your tax basis is the original cost of your home, plus certain improvements and expenses. A higher tax basis means a lower taxable gain when you sell.

How to Calculate Your Home’s Tax Basis

1. Start with your purchase price – Include what you paid for the home and certain closing costs.

2. Add qualifying home improvements – These increase your home’s tax basis, reducing your taxable gain. Examples include:

>> Major renovations (kitchen remodels, basement finishing, landscaping, pools)

> Smaller capital improvements (new windows, built-in appliances, furnaces, water heaters)

>> Subtract any depreciation – If you used part of your home for business or rental purposes, you may need to deduct depreciation claims.

>> Adjust for eco-friendly upgrades – If you received tax credits for energy-efficient improvements, subtract the credit amount before adding the cost to your home’s basis.

Keeping Good Records Saves Money

To make tax calculations easier, keep all major home improvement receipts in a folder. If you lost track of costs, check old bank statements or contact the contractor who did the work.