Are you planning to sell your home in your golden years? Retirement, relocation, or downsizing may influence your decision to list a property. While you can look forward to making a profit, you need to consider how the capital gains tax could take a bite out of what you make.
If you are seeking tax advice, it is always best to get in touch with an expert who can guide you through the particulars of your unique situation. This guide is a helpful starting point to understand the potential implications of the capital gains tax before you decide to list your home for sale. It’s not a substitute for professional tax guidance.
This guide explains what the capital gains tax is, how it can affect 55+ home sellers, and how to reduce tax liability.
What Is the Capital Gains Tax?
When an investor sells an asset, the IRS collects a tax on the profits: the capital gains tax. This tax applies to several types of assets: stocks, bonds, jewelry, cryptocurrency, and yes, real estate.
The IRS treats long-term and short-term capital gains differently. If you have owned your home for more than a year, you will be subject to a long-term capital gains tax. If you own the property for less than a year, you will pay a short-term capital gain tax. The profit on the sale will be treated as regular income. Other factors, like your filing status, income, and whether the home is your primary residence, will influence how much you owe.
You will pay the capital gains tax on your home sale when you file your taxes for the year.
The Capital Gains Exclusion for a Primary Residence
If you are wondering how to avoid the capital gains tax on the sale of a house, it’s best to start by understanding the $250,000/$500,000 home sale tax exclusion.
This exclusion allows you to exclude $250,000 from the profit on the sale of a home that you live in as your primary residence. If you are married and file your taxes jointly, the exclusion amount is twice the individual limit: $500,000. If your profit is below those amounts, you won’t need to pay a capital gains tax. If your profit exceeds those amounts, you’ll need to pay a capital gains tax on the amount in excess of the exclusion.
Keep in mind, there are two rules that govern qualification for this capital gains exclusion:
- Ownership. You or your spouse are required to own the home for at least two of the five years prior to its sale.
- Use. The use rule applies to both spouses. You will both need to live in the house for at least two of the five years running up to the sale.
It’s also important to note that your income may mean you will not owe capital gains on the sale of your primary residence. If you are single or married filing separately with a taxable income of $48,350 or less in 2025, the capital gains tax rate is 0%, according to the IRS. If you file as the head of household, that income amount is $64,750. If you are married and filing jointly, you will not pay capital gains tax on the sale of your home if you make $96,700 or less.
The capital gains tax rate is 15% when your income exceeds these thresholds but remains below $533,400 for single filers, below $300,000 for married filing separately, and below $600,050 for married filing jointly. Income above these thresholds is taxed at a 20% capital gains rate.
These income amounts are subject to change every year.
Common Scenarios for 55+ Home Sellers
Everyone’s real estate journey is different, influenced by their personal circumstances and individual markets. But there are a few common scenarios that may indicate you are ready to sell and should consider the potential implications of capital gains tax on the sale of a house.
- Selling a long-time primary residence. Selling a long-time primary residence can happen at any stage in life. If you are 55 or older, you might be relocating for work, considering retirement, or simply looking for a change of scenery.
When you sell a primary residence you have called home for years, you will need to think about how the long-term capital gains tax will apply.
- Downsizing after retirement. Downsizing is a common goal for people nearing retirement or planning to retire. How could a potential capital gains tax impact your retirement budget and relocation plans?
- Selling after a spouse passes away. Many people 55 and over face the sad prospect of selling a home after the death of a spouse or long-term partner. Depending on when your spouse dies and when you decide to sell, you may have a different filing status that could impact the capital gains tax amount.
If you sell the same year your spouse dies, you will still file under the married status. If more time has passed, and depending on your circumstances, single filing status may apply.
- Relocating to a different state. You might be relocating to a different state for work, family, or a better climate. If you haven’t owned your home for two years but you are relocating for work, the IRS may offer you a work-related move exclusion relating to the capital gains tax.
Situations in Which the Capital Gains Tax May Apply
When you sell your primary residence, you could owe capital gains tax if your income is high enough and you don’t qualify for any exclusions. There are other situations in which you may owe a capital gains tax, such as:
- Not meeting ownership or residency requirements. If you do not meet the ownership or residency requirements on a piece of property you want to sell, you cannot take advantage of the $250,000/$500,000 exclusion.
- Selling a second home or vacation property. The IRS treats second homes and vacation properties differently from primary residences. If you are ready to sell real estate you own but do not use as your primary residence, you cannot use the $250,000/$500,000 home sale tax exclusion.
The amount of capital gains tax you owe on the profit of the sale will still depend on factors like length of ownership, your income, and your filing status. If you have owned the property for less than a year, you will be subject to the short-term capital gains tax. If you’ve owned it for longer, the long-term capital gains tax applies. The same income rules apply to the sale of secondary properties. If you earn below a certain amount, the tax rate will be 0%. Your income could push the rate up to 10% or higher, up to 20%.
- Selling a rental or investment property. Rental and investment properties are subject to the same capital gains tax rules. If you own for less than a year, you will pay a short-term capital gains tax on the profit of the sale. If you own it for more than a year, you will pay a long-term capital gains tax. As these properties are not your primary residence, they aren’t eligible for the $250,000/$500,000 exclusion.
The tax rate, again, will depend on your income and filing status.
You can potentially defer paying the capital gains tax on an investment property sale by leveraging a 1031 exchange, which allows you to replace one investment property with another.
- Selling after converting a primary residence to a rental. You might find the idea of converting your primary residence to a rental appealing as you consider or enter retirement. You can still sell that rental property and take advantage of the $250,000/$500,000 exclusion as long as you have lived in it as your primary residence for two of the five years leading up to its sale.
If you do not pass the ownership and use tests, you cannot leverage that exclusion.
Timing Considerations for 55+ Sellers
You can’t always control the timing of a move. But the more runway you have, the more time you have to ask the right questions about your tax implications and to understand your options.
If you consider the ownership and use rule well in advance of a potential sale, you have time to adjust accordingly. For example, if you plan to eventually sell a vacation home, you could treat it as your primary residence for two years to qualify for the $250,000/$500,000 exclusion.
It is also important to distinguish between short- and long-term capital gains taxes. If you decide to sell a home you’ve owned for less than a year, the profit from the sale will be subject to the short-term capital gains tax, which is usually higher than the long-term capital gains tax.
FAQ: Capital Gains Tax on a House Sale
How do I avoid capital gains tax when selling my house?
Many homeowners qualify for the $250,000 (single) or $500,000 (married filing jointly) home sale exclusion if the property was their primary residence for at least two of the five years before the sale. If your profit falls below those thresholds, you may not owe capital gains tax. Meeting the ownership and use requirements is key.
What is the 2-out-of-5-year rule?
To qualify for the home sale exclusion, you must have owned and lived in the home as your primary residence for at least two of the five years leading up to the sale. The two years do not need to be consecutive.
Do I have to buy another house to avoid capital gains tax?
No. The old rule that required purchasing another home no longer applies. Today, you can qualify for the exclusion without reinvesting in a new property, as long as you meet IRS ownership and use requirements.
How is capital gains calculated on the sale of a house?
Capital gain is generally calculated by subtracting your adjusted cost basis (what you paid for the home plus certain improvements and selling costs) from the sale price. The resulting profit is the amount potentially subject to capital gains tax.
What is the capital gains tax rate on a home sale?
Rates depend on how long you owned the property and your taxable income. Long-term capital gains (for homes owned more than one year) are typically taxed at 0%, 15%, or 20%, depending on income. Short-term gains are taxed as ordinary income.
Do seniors over 55 get a one-time capital gains exemption?
No. The one-time exemption for homeowners over 55 was eliminated in 1997. The current exclusion rules apply regardless of age.
Do I have to pay capital gains tax if I sell my home at a loss?
No. If you sell your primary residence for less than your adjusted cost basis, you do not owe capital gains tax. However, losses on the sale of a personal residence are generally not tax deductible.
What home improvements reduce capital gains tax?
Certain improvements—such as adding a room, remodeling a kitchen, replacing a roof, or installing new systems—can increase your cost basis and reduce taxable gain. Routine repairs and maintenance typically do not qualify.
Is capital gains tax different for a second home or vacation property?
Yes. The $250,000/$500,000 exclusion does not apply to second homes or vacation properties unless you convert the property into your primary residence and meet the ownership and use requirements. Otherwise, the full gain may be taxable.
How is capital gains tax handled on a rental property?
Rental properties do not qualify for the primary residence exclusion unless they were previously used as a primary residence and meet specific timing requirements. In addition to capital gains tax, sellers may also owe depreciation recapture tax.
What happens if I convert my primary residence into a rental before selling?
You may still qualify for the home sale exclusion if you lived in the home for at least two of the five years before the sale. However, depreciation claimed during the rental period may be subject to recapture tax.
Do I pay capital gains tax the year I sell my house?
Yes. Any capital gains tax owed is reported and paid when you file your federal income tax return for the year in which the sale occurred.
How does selling a home after a spouse dies affect capital gains tax?
If a spouse passes away and the home is sold within certain timeframes, a surviving spouse may still qualify for the full $500,000 exclusion if filing jointly in the year of death. After that, the exclusion may revert to $250,000 for single filers, depending on circumstances.
Does moving to another state affect capital gains tax?
Federal capital gains tax rules apply nationwide. However, some states also impose their own capital gains or income taxes, which may affect your total tax liability after a move.
Can I defer capital gains tax on a property sale?
For investment or rental properties, a 1031 exchange may allow you to defer capital gains tax by reinvesting proceeds into another qualifying investment property. This strategy does not apply to primary residences.
Selling with Confidence and Clarity
Selling a home can be both exciting and daunting. There are a lot of moving parts when you consider how to keep as much profit as possible and move forward with the next phase of your life. Gaining a clear understanding of the tax implications, including any applicable exclusions, can empower sellers to move forward with confidence.
If you’re ready to begin your real estate journey, 55places.com can help you sell your home and find your next one. Contact us today!
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