Capital gains tax on real estate and home sales: A guide

As a homeowner, you’ll have to pay taxes related to your property from the time you buy the house all the way through the home sale. One of the taxes you’ll encounter when selling your home is the capital gains tax.

Capital gains tax may not be the most exciting part of selling your home, but it’s important to know how it’ll impact your sale. Let’s take a closer look at the capital gains tax for 2024 and 2025, including what it means and how you can reduce your tax burden when you sell your home.

What is the capital gains tax on real estate?

The capital gains tax is what you pay on an asset’s appreciation during the time that you owned it. For example, when you sell your home or another piece of property, you are typically taxed on the difference between the sale price and your original purchase price. The tax rate amount depends on your income, your tax filing status and the length of time you’ve owned the asset.

The capital gains tax can apply to any type of asset that increases in value. Most people encounter this tax when they sell their primary residence. You may be subject to the capital gains tax if your home’s sale price is more than what you initially paid for it.

You pay the capital gains tax the same year that you sell your house; when you file your tax return.

How do capital gains taxes work?

You may be required to pay the capital gains tax on the amount you profit from selling your home.

Let’s take a look at an example.

Let’s say you bought your home for $150,000 and you sold it for $200,000. Your profit, $50,000 (the difference between the two prices), is your capital gain – and it may be subject to the tax.

If you’re selling your primary residence, you may be able to avoid paying the capital gains tax on the first $250,000 gain if you’re a single tax filer and $500,000 for married couples filing jointly.

For a single filer or married couple, an equation to figure this out looks like:

Taxable Capital Gain = (Selling Price - Purchase Price) - Exemption Amount

You only pay the capital gains tax after you sell an asset. Let’s say you bought your home 2 years ago and it’s increased in value by $10,000. You don’t need to pay the tax until you sell the home.

Capital gains tax and capital home improvements

In the example above, your home’s purchase price is your cost basis in the property. Now, let’s assume that you spent $50,000 on a kitchen renovation.

This is considered a capital improvement because the renovation increases the overall value of your home. So, your cost basis is now $200,000. That’s $150,000 (the original purchase price) + $50,000 (the amount spent on the capital improvement).

If you sell your home after the renovation for $200,000, your profit is $0, so there’s no capital gains tax.

What is the capital gains tax rate?

Your capital gains tax rate depends on your current income tax bracket, the length of time you’ve held the asset and whether the property was your primary residence. We’ll look at that below.

It’s also important to know the type of asset you’re dealing with. While most long-term capital gains are taxed at rates of up to 20% based on income, there are situations in which higher rates apply.

Special asset classes for long-term capital gains tax

The following table includes types of assets and their respective capital gains tax rate as of 2025, according to the IRS: 

There are special rules that apply for gifts of property or inherited property, patents or certain types of investment income like commodity futures. For tax purposes, these dates are calculated from the day after the original purchase to the date of sale of the property.

Short-term vs. long-term capital gains tax

When thinking about selling a capital asset for a gain or loss, the first question to ask is, “When did I buy this?” 

If you bought the asset less than a year ago, the gain or loss is short-term and taxed as ordinary income. If you held it for over a year, it qualifies as a long-term capital gain, which benefits from lower tax rates—it may even be exempt if it’s your primary residence.

Keep in mind that there are exceptions for property that’s gifted or inherited. Review Publication 544 from the Internal Revenue Service (IRS) for more information about these exceptions.

Short-term capital gains tax: Explained

If the rules above say you owe short-term capital gains tax, your profit gets taxed at your ordinary income tax rate.

You can think of short-term capital gains tax like a staircase — the higher your total income, the higher your tax rate climbs. The additional profit from the sale can push you up into a higher tax bracket, which may increase how much tax you’ll pay on the extra money.

For example, in 2024, if a married couple filing jointly has a taxable income of $94,300, additional short-term gains would be taxed at 22%. If their income surpasses $201,050, any extra earnings above that level would be taxed at 24%, and so on.

But remember, when you sell a home or property, there are usually special tax rules. Speaking with a tax professional can help you understand exactly which rules apply to you, so you don't accidentally end up paying more in taxes than you need to.

Short-term capital gains tax rates for 2024

For the 2024 tax season, the short-term capital gains tax rates are as follows:

Short-term capital gains tax rates for 2025

In 2025, tax brackets went up by about 2.8% to keep up with inflation. While this may seem like a small increase, it can make a significant difference when you go to file your taxes.

For example, in 2024, if a married couple made more than $94,300, any extra money they earned was taxed at 22%. But in 2025, that limit moves up to $96,950.

That means an extra $2,650 ($96,950 - $94,300) gets taxed at just 12% instead of 22%, so you end up keeping more of your money.

For the 2025 tax season, the short-term capital gains tax rates are as follows:

Short-term capital gains tax for estates or trusts for 2024

If an estate or trust sells real estate of another asset for a profit in less than a year, tax rules are slightly different. If the estate or trust keeps the profits from the sale, it has to pay the capital gains tax itself. However, if the estate or trust distributes the profits to beneficiaries, the beneficiaries pay the tax instead.

For the 2024 tax season, the short-term capital gains tax for estates are as follows:

Remember, a home is considered a short-term investment if you sell it within a year. Capital gains on short-term investments are taxed as ordinary income, not with special tax breaks. 

For example, if you make a $50,000 profit flipping a house and earn a $50,000 salary, your total income for tax purposes would be $100,000. To reduce tax liability, you can deduct eligible expenses and account for all costs carefully.

Short-term capital gains tax for estates or trusts for 2025

Short-term capital gains taxes for estates and trusts also adjusted for inflation for 2025.

For the 2025 tax season, the short-term capital gains tax for estates are as follows:

Long-term capital gains tax: Explained

Owning your home for more than a year means you pay the long-term capital gains tax. After 2 years, you’ll qualify for the personal exemption – more on that below. Unlike the seven short-term federal tax brackets, there are only three capital gains tax brackets.

The long-term capital gains tax rates are much lower than the corresponding tax rates for standard income. You may not need to pay the tax at all if you make less than the minimum amount listed below.

Long-term capital gains tax rates for 2024

The percentage you pay on your capital gains depends on your filing status and how much money you made last year.

Here are the long-term capital gains rates for taxpayers filing in 2025.

Long-term capital gains tax rates for 2025

Long term capital tax brackets also increased by roughly 2.8% in 2025.

For example, let’s say a married couple made over $583,750 in 2024. This means that any extra money they earned from a home or property sale was taxed at 20%. But in 2025, that threshold moves up to $600,050. Now, an extra $16,300 can be taxed at 15% instead of 20%, which means less money goes toward taxes and more stays in their pocket.

How to avoid capital gains taxes on an investment property

You can try to minimize your tax burden by selling the home strategically if you have an investment property. The capital gains exemption on homes doesn’t have a counterpart in the investment property realm.

Reinvest sale proceeds

Many real estate investors engage in 1031 (like-kind) exchanges. In a 1031 exchange, a real estate investor sells their current property, but then rolls the proceeds into a new investment opportunity and postpones their capital gains taxes indefinitely.

Another alternative available to longtime real estate investors with large capital gains tax liabilities is to transfer those assets into an opportunity zone. Investors can then enjoy a step up in basis after 5 years. After 10 years, the gains become tax-free.

Offset capital gains with capital losses

Just as individual homeowners might choose to sell their home when their income is at a low ebb, businesses may want to offset capital gains with capital losses. When you sell your asset for less than your adjusted basis, the IRS considers that a capital loss.

Deduct the costs incurred by the sale

You can also deduct any repairs or renovations you made to an investment property to improve the final selling price of the home. Remember to keep documentation such as mortgage statements, bills, deeds of sale, credit card statements, and other similar papers to prove how much you spent. These documents will be important if you’re audited.

Real estate capital gains tax FAQs

To learn more about the capital gains tax on real estate properties, review the following frequently asked questions.

How much is capital gains tax on real estate?

The amount you pay in capital gains tax can vary and depends on your income, tax filing status, the amount of time that you’ve owned your property and whether the house is your primary residence. The amount you end up with as a profit after selling your property is the capital gain that will be taxed.

When do I pay the capital gains tax on real estate?

If you’re required to pay the capital gains tax, you pay it when you sell your property. Be sure to check the IRS requirements for paying the capital gains tax to determine when you have to pay and if you’re eligible for an exemption.

How do I avoid the capital gains tax on real estate?

If you’ve owned and occupied your property for at least 2 of the last 5 years, you can avoid paying capital gains taxes on the first $250,000 for single-filers and $500,000 for married people filing jointly.

You can visit the IRS website to review additional rules that may help you qualify for the capital gains tax exemption.

Do I have to pay the capital gains tax if I sell a second home or rental property?

Because rental properties and second homes are considered assets, you may be subject to pay the capital gains tax. However, there are also ways to avoid paying the tax on these property types, especially if they’ve increased in value in recent years.

Can I claim a capital loss on the sale of my home?

Generally speaking, the IRS doesn’t allow you to deduct capital losses when selling your home or other personal property. Simply put, if you sell your house for less than you paid for it, you can’t write off as a loss on your taxes.

The only capital losses you can deduct are from property used for business or certain disaster-related losses. However, disaster-related losses are only deductible if they result from a federally declared disaster, at least until 2025.

Does the capital gains tax apply to the sale of property held in a trust?

Yes, however, it depends on how the trust is set up and who ends up with the profits from the sale of the property. If a property is in a revocable trust when it's sold, taxes are pretty straightforward. The IRS treats the home as if the original owner (the "grantor") still owns it. This means when the home sells, the grantor pays taxes on the profit.

On the other hand, if the trust has started giving out its money or property (this might happen after the grantor dies or after a certain amount of time), then who pays the taxes depends on how the trust is set up. If the trust keeps the money from the sale and reinvests it, the trust itself pays taxes on the profit. But if the profits are passed to the trust’s beneficiary, then that person is responsible for paying the capital gains tax.

The bottom line: Understanding capital gains taxes on real estate is important

No matter which type of property you decide to sell, take careful note of how much money you spend finding and securing a buyer. From marketing expenses to closing costs paid by the seller (like real estate agent fees), you can deduct these costs from your taxes, though you should speak to a tax advisor for further insight.

Looking for other real estate tax tips? Learn more about the top tax benefits of real estate investing.