Capital gains

Capital gains is the profit realized when an asset sells for more than its adjusted basis. For a home sale, the realized gain is the sale price minus selling costs (commissions, transfer tax, attorney fees) minus the adjusted basis (original purchase price plus capital improvements). On a primary residence held more than a year, the gain is taxed as long-term capital gain at preferential federal rates of 0%, 15%, or 20% depending on the seller's taxable income, with state and Net Investment Income Tax sometimes layered on top.

How it works: federal long-term cap gains rates are bracketed by income. Most filers fall in the 15% bracket. High-income filers (single above ~$518k or MFJ above ~$583k for 2026) pay 20%. Low-income filers can sometimes hit the 0% bracket. State capital gains tax varies enormously, nine states (FL, TX, WA, NV, TN, NH, SD, WY, AK) don't have state income tax and therefore don't tax capital gains; California, New York, and New Jersey are at the high end with rates 10%+. The 3.8% NIIT stacks on for high-income filers.

Why it matters: on a primary residence, the § 121 exclusion shields up to $250,000 of gain for single filers / $500,000 for MFJ from federal tax. Many home sales fall fully under the exclusion and produce no federal tax. Sales that exceed the exclusion can produce material tax bills, sometimes six figures on long-held appreciated homes.

Common gotcha: capital improvements made during ownership add to basis, which reduces the realized gain. Improvements include kitchen and bath remodels, additions, new roof, new HVAC, and other capital expenditures. Repairs and routine maintenance don't count. Sellers who keep documentation of improvement costs over years of ownership can often add tens of thousands to their basis, materially reducing taxable gain at sale.