Capital gains tax in real estate is a levy on the profit you realize when you sell property for more than your adjusted cost basis. In other words, it’s the tax on the difference between the sale price and what you originally paid—plus any eligible adjustments like improvements and closing costs.
Whether you’re selling your primary residence or an investment property, understanding capital gains tax helps you anticipate your net proceeds, optimize tax strategies and avoid unpleasant surprises at filing time.
Your adjusted basis starts with the original purchase price and increases with qualifying improvements (roof replacement, additions, major renovations) and acquisition expenses (closing fees, title insurance, legal costs).
Gross proceeds equal your total sale price minus selling costs such as real-estate commissions, advertising fees and title transfer charges. This figure represents the cash you actually receive.
Once you have your adjusted basis and gross proceeds, apply the simple formula:
Capital Gain = Gross Proceeds − Adjusted Basis
If you own a property for one year or less, any gain is considered short-term. Holdings longer than one year qualify for long-term treatment.
Short-term gains are taxed at your ordinary income rate (up to 37% for individuals). Long-term gains enjoy preferential federal rates of 0%, 15% or 20%, depending on your taxable income and filing status.
On top of federal tax, many states impose their own capital gains rates. High-income taxpayers may also face a 3.8% Net Investment Income Tax (NIIT) on net gains over certain thresholds.
Homeowners who live in a property for at least two of the last five years may exclude up to $250,000 of gain ($500,000 for married couples filing jointly) when selling their primary residence.
Energy-efficient upgrades, room additions and other qualifying capital improvements increase your basis, reducing taxable gain. Keep receipts and contractor invoices to substantiate costs.
Selling expenses like agent commissions, title fees and legal charges directly offset your gross proceeds. Rental property owners must also account for depreciation recapture, taxed at a maximum 25% rate.
Under Section 1031, investors can defer capital gains by reinvesting sale proceeds into a similar (“like-kind”) property within strict timeframes, postponing tax until the replacement property is sold.
Opportunity Zones offer tax incentives for redeploying capital gains into qualified projects, potentially deferring and even reducing tax if held long enough.
By structuring the sale as an installment sale, you recognize gain over multiple years, spreading tax liability rather than paying it all in the year of sale.
Report your gain or loss on Form 8949, summarize on Schedule D and, if applicable, use Form 4797 for business or rental property dispositions.
Maintain organized records of purchase and sale documents, improvement receipts, closing statements and valuations. Accurate records support your basis calculations and exclusions.
Watch for errors such as underreporting adjustments, mixing short-term and long-term figures, or omitting eligible exclusions. Double-check all calculations before submitting.
Use closing statements, receipts for improvements, canceled checks and appraisals. Organized records demonstrate your cost basis to the IRS.
No. Section 1031 applies only to investment or business property, not your primary residence—even if you convert it after the sale.
Allocate gain between personal and rental use based on time and square footage. The personal-use portion may qualify for the primary residence exclusion, while the rental portion is subject to capital gains tax and depreciation recapture.
Engage a qualified CPA or attorney before major sales or exchanges to ensure compliance, maximize exclusions and explore advanced planning.
Reference IRS Publication 523 (Home Sales), Publication 544 (Sales and Other Dispositions) and use online capital gains tax calculators for quick estimates.
