How to Avoid Capital Gains Tax on Real Estate

Home prices doubled over the past decade – and that could mean you owe some serious taxes if you are selling your home. After bottoming out at around $259,000 in 2011, the average sale price of a house has marched steadily upward to more than $500,000 in 2024, before dropping down to $357,275 in January 2026 ¹ . This type of growth often leads to the sale of assets. Unfortunately, if you sell real estate for a profit you will owe capital gains taxes on the money. And, unlike the taxes held from wages, the IRS doesn’t take that money upfront. There are ways to make that hurt less though.

If you want help minimizing your tax bill from a home sale, consider working with a financial advisor.

What Are Capital Gains Taxes on Real Estate?

The capital gains tax is levied on any profits you make from selling an investment. This applies to most money that you make through buying and selling assets such as stocks, bonds and even real estate (such as your house). In the case of real estate, you would calculate your taxable profits as follows:

The price you sold the property for – The price you paid to buy the property and the costs of improvements = Taxable profits

So, for example, say you bought your home for $260,000 ten years ago. You sell it today for $450,000. You would owe capital gains taxes on $190,000 (the difference between your purchase price and your sale price).

Long-term capital gains, or gains on assets held for at least a year, are generally taxed at a much lower rate than earned income (money that you get from working). In 2026, the capital gains tax rates ranges for single and joint filers have been set at:

And, for tax year 2025, single and joint filer rates were:

So, from the example above, suppose you sold your house and realized a $190,000 profit in 2025 and had no other income. If you are single, a simplified capital gains calculation would look like this:
$190,000 × 15% = $28,500.

That is a significant tax bill, even though you made $190,000 on the sale. To address this issue, the IRS provides a home-sale capital gains exclusion that may allow you to reduce or eliminate some of the taxable gain.

The Capital Gains Exclusion

If you profit from the sale of your primary home, you can exclude the first $250,000 of that profit from taxes if you’re single. For married couples filing jointly, that amount increases to $500,000. This exclusion applies to your gains, not the total sale price. Using the example above, if you sold your home for $450,000 as a single person and your profit was $190,000, you could exclude the entire gain and owe no capital gains tax.

On the other hand, say you made a $280,000 profit off the sale. After the capital gains exclusion, you would owe taxes on the remaining $30,000. Which, if that was your only income for the year, would fall within the 0 percent capital gains tax bracket, so you wouldn’t owe anything on the gain.

To qualify for this exclusion you must meet the ownership and use test. This means that you must have owned the house and used it as your main residence for at least two years out of the five years prior to its sale. This does not have to be continuous. You can live in the house periodically, so long as it comes to at least two years aggregate.

See IRS Publication 523 for a complete description of the exclusion test requirements ² . Members of the U.S. military, foreign service, Peace Corps and active intelligence can calculate their continuous use differently based on their deployment schedules.

Calculate Your Capital Gains Taxes Correctly

As we mentioned above, capital gains on the sale of a house are slightly more complicated than ordinary investment profits. In addition to the home’s original purchase price, you can deduct some closing costs, sales costs and the property’s tax basis from the sales price, reducing your taxable capital gains 

Closing costs can include mortgage-related expenses. For example, if you had prepaid interest when you bought the house) and tax-related expenses. Sales costs generally apply to any money you spend selling the house. This includes broker’s fees, listing expenses, legal fees, advertising fees, money you spent making the house look more presentable for sale and other related costs.

The house’s tax basis is the cost of any major improvements you made to the property over the years. This is essentially any amount of money you spend on the physical structure that adds value to the home. So, for example, say that you are single and bought a house for $250,000. You sell it for $750,000. You have the following associated costs:

• $40,000 in renovations to the kitchen and bathroom;
• $35,000 in broker’s fees;
• $2,500 spent on cleaning and staging for open houses;
• $5,000 on lawyer’s fees and other associated closing costs.

You would calculate your taxable capital gains as follows:

• $750,000 – ($250,000 + $40,000 + $35,000 + $2,500 + $5,000) = $417,500
• $417,500 – $250,000 (the capital gains exclusion) = $167,500

You would owe taxes on $167,500.

Selling Your House in Less Than One Year Could Cost You

If at all possible, do not sell your home in under a year. You must wait at least two years to sell your house in order to qualify for the capital gains exclusion. However, even if you don’t qualify for the exclusion you still can ordinarily pay the reduced tax rate levied on investment assets.

This reduced rate is what’s known as the long-term investment rate. It only applies to assets that you have held for more than a year. If you own your property for less than 12 months, you have to pay taxes on any profits at the ordinary income rate (that is, the rate at which the IRS taxes work and earned income). This can be significantly higher than the capital gains tax rate.

Bottom Line

The main way to reduce your capital gains taxes is by making sure you calculate all of the reductions that the IRS allows to your overall profits. After that, the capital gains exclusion will eliminate much of the money that most homeowners will make from their sales. If you’re not sure how to avoid as much tax as possible, it’s recommended that you work directly with a professional who has experience in real estate taxation.

Tips for Buying and Selling Real Estate

• It’s great if you can make money off your home, but first and foremost this has to be a place to live. With SmartAsset’s Mortgage calculator you can figure out exactly what that new house will cost you, letting you make the right call for your budget and your future.
• A financial advisor can help you with tax planning so you don’t overpay. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, started now.

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