Will I Pay Taxes When I Sell My House? A Financial Advisor's Guide to Capital Gains Taxes on Home Sales
For many homeowners, selling a house is one of the largest financial transactions they'll ever make. With home values reaching record highs across much of the United States, many sellers are enjoying decades of appreciation—but they're also discovering that selling a home can create an unexpected tax bill.
According to the National Association of Realtors (NAR), the median existing-home sales price increased 1.8% year-over-year in June 2025, marking the 36th consecutive month of annual price appreciation. While rising home values have significantly increased homeowners' wealth, they have also increased the likelihood that a portion of a home's appreciation may be taxable.
One of the most common questions I hear as a financial advisor is:
"Will I have to pay taxes when I sell my house?"
The answer depends on several factors, including how long you've owned the property, whether it qualifies as your primary residence, and how much your home has appreciated.
Fortunately, many homeowners qualify for a generous capital gains exclusion that can eliminate some—or even all—of the taxes owed on the sale.
The Primary Residence Capital Gains Exclusion
Current IRS rules allow homeowners to exclude:
Up to $250,000 of capital gains if filing as a single taxpayer.
Up to $500,000 of capital gains if married filing jointly.
This means that qualifying homeowners may sell their primary residence and pay no federal capital gains tax on gains up to these limits.
To qualify, you generally must meet three requirements.
Requirements to Claim the Home Sale Exclusion
1. Ownership and Use Test
You must have owned and lived in the home as your primary residence for at least two of the five years preceding the sale — The two years do not need to be consecutive.
2. No Recent Home Sale Exclusion
You cannot have claimed the capital gains exclusion on the sale of another primary residence during the two-year period before selling your current home.
3. The Home Was Not Acquired Through a 1031 Exchange
The home generally cannot have been acquired through a recent Section 1031 like-kind exchange, where capital gains from investment real estate were deferred.
If these requirements are satisfied, you may qualify for the exclusion.
Why More Homeowners Are Paying Capital Gains Taxes
Although the exclusion remains generous, one important fact often goes unnoticed:
The $250,000/$500,000 exclusion has not changed since 1997.
Meanwhile, home prices have appreciated dramatically over the past two to three decades.
Many homeowners who purchased homes 20 or 30 years ago are now sitting on gains that substantially exceed the exclusion amount.
As a result, understanding how capital gains are calculated has become more important than ever.
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What Happens If My Gain Exceeds the Exclusion?
Any gain that exceeds the allowable exclusion generally becomes taxable.
Capital gains fall into two categories:
Short-Term Capital Gains
If a property is held for one year or less, any gain is generally taxed as ordinary income, using your marginal federal income tax bracket.
Long-Term Capital Gains
Homes owned for more than one year generally qualify for the more favorable long-term capital gains tax rates of:
0%
15%
20%
The applicable rate depends on your taxable income.
One of the Best Ways to Reduce Taxes: Increase Your Cost Basis
Although you cannot control tax laws, you can make sure your home's cost basis is calculated correctly.
Many homeowners unknowingly overlook expenses that legitimately increase their cost basis and reduce taxable gains.
This is where careful record keeping can potentially save thousands of dollars.
What Expenses Increase Your Cost Basis?
Your adjusted cost basis generally begins with the original purchase price of your home.
Certain acquisition costs and qualifying capital improvements can then be added to that basis.
Click here to read the full list of eligible improvements on IRS publication 523
Examples include:
Purchase Costs
Certain settlement and closing costs may increase basis, including:
Abstract fees
Title fees
Survey costs
Recording fees
Legal fees
Owner's title insurance
Certain transfer taxes
Utility connection charges
Capital Improvements
Unlike routine repairs and maintenance, capital improvements add value to the property, prolong its useful life, or adapt it to new uses.
Examples include:
Additions
Bedroom additions
Bathroom additions
Garages
Decks
Patios
Porches
Exterior Improvements
New roof
New siding
Replacement windows
New driveway installation
Walkways
Retaining walls
Fencing
Swimming pools
Mechanical Systems
HVAC replacement
Furnace replacement
Central air conditioning
Plumbing replacement
Septic system replacement
Water heater
Electrical rewiring
Irrigation systems
Interior Improvements
Kitchen remodels
Bathroom remodels
Built-in appliances
Fireplace installation
Permanent flooring replacement
Major insulation improvements
Important: Routine maintenance—such as painting, carpet cleaning, repairing small roof leaks, or basic landscaping—generally does not increase your cost basis.
Keeping invoices and receipts for qualifying improvements can substantially reduce your future tax liability.
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Home Sale Tax Example
Let's look at an example.
Sammy, a single widow, purchased her home 33 years ago for $95,000.
Today, the property is worth $550,000.
Assuming Sammy qualifies for the primary residence exclusion:
Purchase price: $95,000
Sale price: $550,000
Capital gain:
$550,000 − $95,000 = $455,000
After applying the $250,000 exclusion, Sammy would still recognize:
$205,000 of taxable capital gain.
How Good Record Keeping Can Save Thousands
Now let's assume Sammy carefully saved documentation for qualifying capital improvements throughout her ownership.
She finds receipts for:
In-ground swimming pool
New HVAC system
New roof
New fencing
New flooring
Driveway replacement
Closing costs from purchasing the home
Certain qualifying selling expenses
The qualifying improvements total $155,000.
Her adjusted cost basis now becomes:
$95,000 + $155,000 = $250,000
Her taxable gain becomes:
$550,000 − $250,000 = $300,000
After applying the $250,000 exclusion, only:
$50,000 remains subject to capital gains tax.
Potential Tax Savings
By maintaining accurate records, Sammy reduced her taxable gain from:
$205,000
to
$50,000
That's a reduction of $155,000 in taxable gain.
Depending on her tax bracket, this could save over $23,000 in federal taxes, plus any applicable state income taxes.
Don't Forget the Impact on Medicare and ACA Subsidies
Reducing taxable capital gains isn't just about lowering your tax bill.
Large capital gains also increase your Modified Adjusted Gross Income (MAGI), which can affect other areas of your financial plan.
Higher MAGI may:
Increase your Medicare Part B and Part D premiums through IRMAA
Reduce or eliminate your eligibility for Affordable Care Act (ACA) premium tax credits
Increase the taxation of Social Security benefits
Affect other income-based tax provisions
This is why coordinating the sale of a home with your broader retirement income strategy is so important.
Final Thoughts
Selling your home may be one of the largest financial transactions you'll ever make, and understanding the tax implications before you list your property can potentially save you tens of thousands of dollars.
While many homeowners qualify for the IRS home sale exclusion, decades of appreciation mean that an increasing number of sellers are generating gains that exceed the exclusion limits.
Fortunately, careful planning can significantly reduce the amount of taxable gain. Maintaining detailed records of qualifying capital improvements, understanding your adjusted cost basis, and coordinating the timing of your home sale with your overall retirement income plan can all help minimize taxes.
Before selling your home, consider speaking with both a qualified financial advisor and a CPA to ensure you're taking advantage of every available tax-saving opportunity.
A little planning today could save you thousands of dollars tomorrow.
As always have a wonderful day,
a better weekend,
and I look forward to writing to you next Friday!
Written by Ryan Morrissey CFP®, CLU®, CHFC®, CMFC
Founder & Principal Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast
Sources:
National Association of Realtors - Existing-Home Sales Report Shows 2.4% Decrease in June
IRS - Tax Considerations When Selling A Home
Charles Schwab - Selling A Home? Beware of Potential Capital Gains Tax
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Frequently Asked Questions
Will I pay taxes when I sell my primary residence?
Not necessarily. Many homeowners qualify to exclude up to $250,000 of capital gains ($500,000 for married couples filing jointly) if they meet the IRS ownership and residency requirements.
What home improvements increase my cost basis?
Qualifying capital improvements include additions, new roofs, HVAC systems, kitchen remodels, bathroom renovations, new siding, replacement windows, electrical upgrades, plumbing replacements, and other improvements that add value or extend the life of the home.
Do repairs increase my cost basis?
Generally, no. Routine maintenance and repairs typically do not increase your home's cost basis unless they are part of a larger capital improvement project.
Can selling my home affect my Medicare premiums?
Yes. Capital gains from the sale of your home may increase your Modified Adjusted Gross Income (MAGI), which could result in higher Medicare Part B and Part D premiums through IRMAA.
Can selling my home affect my ACA health insurance subsidy?
Yes. Capital gains are included in your Modified Adjusted Gross Income and may reduce or eliminate your eligibility for Affordable Care Act premium tax credits.
Sources
Internal Revenue Service. Publication 523 – Selling Your Home.
Internal Revenue Service. Publication 551 – Basis of Assets.
National Association of Realtors. Existing Home Sales Data (2025).