What Is Capital Gains?
Capital gains are the profit made from selling a property for more than its purchase price plus improvements — potentially subject to capital gains tax, though many primary-residence sales qualify for an exclusion.
Capital Gains in plain English
A capital gain is the profit from selling property for more than its adjusted basis - roughly what you paid plus the cost of improvements, minus certain deductions such as depreciation on a rental.
For a main home, many sellers owe no tax on the gain because of the federal home-sale exclusion. Rental and investment property is treated differently.
Why it matters
If you owned and lived in the home as your main residence for at least two of the five years before the sale, you can generally exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly. Gains above that, and gains on other property, can be taxable.
What it means for you
What sellers should know
Gather closing statements and improvement receipts before you sell.
What investors should know
Model taxes before selling a rental, and consider whether an exchange fits your plans.
Common mistakes
- Not keeping records of improvements, which raise your basis and lower the gain.
- Assuming the home-sale exclusion applies to rental or vacation property.
- Forgetting that depreciation taken on a rental affects the taxable gain when you sell.
Compare and common questions
Capital Gains: frequently asked questions
Do I pay capital gains tax when I sell my house?
Often not, if it was your main home. You can generally exclude up to $250,000 of gain ($500,000 married filing jointly) if you meet the ownership and use tests.
What counts toward my home's basis?
Generally the purchase price, certain buying costs and the cost of improvements that add value or extend the home's life - not routine repairs.
Are gains on rental property taxed differently?
Yes. The home-sale exclusion generally does not apply, and depreciation claimed while renting affects the tax when you sell; ask a tax professional.
Related Terms
Where it fits
- Investing, Exit: before this, 1031 Exchange; next, Depreciation Recapture.
More Owning Terms
Recommended next step
Estimate your gain and how much the exclusion covers.
Home sale capital gains calculator →Sources and review
- Publication 523, Selling Your Home, Internal Revenue Service. Supports: The $250,000 / $500,000 home-sale exclusion and the ownership and use tests.
- Publication 527, Residential Rental Property, Internal Revenue Service. Supports: Depreciation of residential rental property.
Where this applies: United States federal income tax. State income taxes may also apply. General information, not tax advice.
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Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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