Thinking about selling your home? Here’s what you need to know about the potentially hefty tax burden before you put up the “For Sale” sign.
Whether you are planning to downsize, relocating to be closer to family, or moving to your dream house, selling your home and moving is a major transition in retirement. It takes decisiveness to find your next home and planning to complete the move. Taxes are usually the last thing on the seller’s mind, but it can be a significant hidden cost that surprises retirees during filing season.
Most people know they will have to pay more taxes when they sell their home, but they accept that as an unavoidable part of the process. In this case, however, knowledge is power and when correctly applied can potentially lower your tax bill by thousands of dollars.
Today I’ll break this down into two sections:
How to determine your tax bill when you sell your home. It’s not simply your federal income tax bracket - the distinction is important. Understanding this part will help you budget for taxes before selling.
What can be done to lower your tax burden. We’ll look at ways to benefit from the tax code and proactive strategies to chip away at a high tax bill.
How your Home Sale is Taxed
When you sell your home, capital gains taxes apply instead of your ordinary income tax rate. If you’ve owned the home for longer than a year, your tax bill is significantly lower than selling a home you’ve owned for less than a year.
The capital gains brackets in 2025 are as follows:
Filing Status
0% Rate (Up to)
15% Rate (Up to)
20% Rate
Single
$48,350
$533,400
$533,400+
Married Filing Jointly
$96,700
$600,050
$600,050+
You’ll notice that most people will pay a 15% long-term capital gains rate. Long-term capital gains tax rates are lower than ordinary income tax rates and apply to real estate, investment assets, and physical assets held for more than one year. Selling an asset you’ve owned for less than a year is considered a short-term capital sale and will be taxed at your ordinary income tax rate.
Let’s bring it back to your upcoming home sale.
You will need some numbers before you can calculate your tax bill:
Sale price: what you sell the home for
Cost basis (with adjustments): Original purchase price plus the cost of any home improvements. Common projects that add to your cost basis are kitchen and bathroom remodels, energy-efficient addons, and adding accessibility (such as ramps and chair lifts)
Selling costs: realtor commissions and escrow fees
Your taxable gain = Sale price - Adjusted cost basis - Selling costs
Example: Bob’s Home Sale
Bob sold his primary home in 2025 for $1,000,000. He originally paid $250,000 for it. Over the years he completed projects on the house including a kitchen remodel that cost $50,000 and re-did the fencing for $5,000. His selling costs total $60,000.
Bob’s taxable gain is 1,000,000 - ($250,000 + $50,000 + $5,000) - $60,000 = $635,000
Let’s assume Bob doesn’t qualify for the $250,000 home sale exclusion (more on that later). What would his tax bill look like?
Bob’s Tax Bill Without the Exclusion
Going back to our simple example, Bob earned $100,000 in taxable income this year in pension benefits and retirement account withdrawals. As a single filer, this puts him in the 22% federal tax bracket.
Bob will pay long-term capital gains tax on his taxable gain. Going back to the capital gains table from earlier, that means he will pay a 15% tax rate on most of the gains and 20% on the rest.
One important thing to remember is that long-term capital gains are taxed on top of your regular income. Your ordinary income determines where your capital gains begin in the tax bracket.
With his taxable gain of $635,000, the math works out this way:
Type of Income
Amount
Tax Rate
Tax Owed
Ordinary Income
$100,000
Regular brackets
Included in base tax
LTCG (first $433,400)
$433,400
15%
$65,010
LTCG (remaining $201,600)
$201,600
20%
$40,320
Total Capital Gains Tax
—
—
$105,330
In Bob’s case, his $100,000 income puts him in the 15% long-term capital gains rate off the bat. That means there is room for $433,400 of gains to be taxed at 15%.
$433,400 x 15% = $65,010 of taxes
The remaining $201,600 of gains will be taxed at 20%.
$201,600 x 20% = $40,320 of taxes
Add it up and the tax bill amounts to $105,330.
Watch out for Net Investment Income Tax (and others)
On top of the taxes due directly from selling your home, the dramatic increase in gross income that year can trigger other “stealth” taxes that you may not have considered.
If your modified Adjusted Gross Income exceeds $200,000 (single) or $250,000 (joint), you may be subject to Net Investment Income Tax (NIIT). NIIT is an additional 3.8% tax on the lesser of:
Net investment income or
The amount by which your MAGI exceeds the threshold.
Other items that may affect your overall tax situation include:
Higher Medicare surcharges (IRMAA)
Higher taxation of Social Security benefits
Phaseout of tax credits and deductions
Disallowing Traditional IRA deductibility (if still working)
That’s a major tax expense - but there is good news. The IRS offers a major tax break for homeowners who sell their primary home and meet the criteria. Let’s look at how that works in the next section.
Lowering your Tax Burden
Now we move onto the steps that can be taken to prevent a large tax bill from eating away at your home sale proceeds.
As I alluded to earlier, the IRS allows homeowners selling their primary home to exclude up to $250,000 in capital gains for single or $500,000 for joint filers.
The criteria to take advantage of this IRS code Section 121 exclusion is the homeowner must have owned and used the home as their primary residence for two of the last five years. The exclusion can be used once every two years.
You may be able to claim a partial exclusion if you don’t meet the criteria to use the full amount.
Bob’s Tax Bill with the Exclusion
Back to our example with Bob. If he qualifies for the $250,000 exclusion, his taxable gain decreases from $635,000 to $385,000.
That means he never goes above the 15% capital gains tax rate.
Instead of owing $105,330 in taxes without the exclusion, he ends up with a much lower burden of $57,750.
Type of Income
Amount
Tax Rate
Tax Owed
Ordinary Income
$100,000
Regular brackets
Included in base tax
LTCG (first $433,400)
$385,000
15%
$57,750
Next, we’ll look at how to lower your tax burden further if your gains exceed the exclusion amount.
Harvesting Capital Losses
Another way to significantly lower your tax bill in the year of your home sale is through harvesting capital losses in your investment portfolio.
Let’s say a stock that you’ve owned for three years in a brokerage account is showing deep losses. Although you hesitated to sell it before because it lost half its value, you can sell or trim from it this year to save you taxes.
Your capital losses for the year are used to offset your capital gains. That means your realized investment losses will subtract from the taxable gain from selling your home.
Example: If you are in the 15% capital gains tax bracket and realize a $25,000 loss on a stock investment to offset some of your capital gain, that lowers your tax burden by $3,750.
You can turn around after selling and immediately buy a similar (but not identical) investment to keep your money invested in the market.
Maximize Contributions
If you or your spouse still contribute to a retirement account, maximizing your contributions in the year of your home sale can be a great way to save on taxes.
Use your company retirement plan (such as 401(k), 403(b), IRAs) to lower your taxable income and stay in the lower capital gains brackets.
In 2025, those over 50 can contribute up to $31,000 to their 401(k) or 403(b) with an additional catch-up available to those between the ages of 60-63. Even if you have slowed down your retirement contributions as you prepare to enter your retirement years, it is wise to consider maximizing your tax-deferred vehicles in a year where your tax bill may be outsized compared to future years.
Charitable Giving Strategies
If you are charitably inclined, consider timing your giving in the year of your home sale to maximize your deductions.
Large gifts of appreciated stock, using a donor advised fund, or Qualified Charitable Distributions out of your IRA can significantly lower your tax bill for the year.
If your plan is to give consistently, consider bunching the next few years of donations into the tax year of your home sale to offset the higher-than-normal tax burden.
Reporting the Sale to the IRS
After you’ve completed the sale of your home, determine if it needs to be reported to the IRS. If all of the following are true then you generally don’t need to report it on your tax return:
The home was your primary residence.
You lived in the home for two of the last five years.
Your capital gain was less than the exclusion amount. $250,000 if single or $500,000 married filing jointly.
You did not use the exclusion on another property in the last two years.
If you still have a capital gain after the exclusion or you receive a 1099-S from the title company, you will need to report it on your tax return on Form 8949. Work with your CPA to correctly track your adjusted cost basis and closing costs.
Key Takeaways
The best time to create a tax plan for this is before you’ve listed your home on the market. Doing so gives you a path to lowering your tax bill as much as possible through the Section 121 principal home exclusion and long-term capital gains tax vs. ordinary income.
Consider all the improvements you have made to your home that affect its cost basis.
After knowing the amount of capital gains you’ll be on the hook for, look at proactive ways to offset the gains in the same tax year. Harvesting portfolio losses, maxing out tax-deferred retirement contributions, and charitable giving are effective ways to lower your tax bill.
Know when you must report the sale to the IRS and what tax forms are involved. Work with your CPA to report the transaction correctly.
From past experience working with clients selling their homes, the potential tax bill is often an afterthought. But with proactive planning and the right tax strategy, you can end up saving thousands of dollars. If you’re considering selling your home, let your CPA and financial advisor know early, then let your team of professionals go to work for you.
Travis
Investment advisory services offered through Andrews Advisory Associates LLC, a registered investment advisor. This blog is not meant to give investment advice. Before investing in any advisory product please carefully read any disclosure documents, including without limitation, the firm’s Form ADVs. The information herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit your financial status, risk and return profile or preferences. Investment recommendations may change, and readers are urged to check with their investment adviser before making any investment decisions.
Comments