Demystifying real estate: What to know about capital gains taxes when selling a home

If you’re considering selling a home, you may have a lot of emotions you’re dealing with. From feelings like stress to excitement to uncertainty, there are any number of things you might be thinking about with this milestone. And one of those causing stress may be the idea of capital gains taxes. If you don’t know how capital gains taxes may affect your sale, you’ll want to keep reading.

The good news is that homeowners can avoid paying these taxes altogether. The caveat? You must meet certain requirements. Here’s what you need to know about these taxes and how to navigate them if you’re thinking of selling your home.

Capital gains taxes apply to the profit you make when selling an asset — which includes any real estate you may own. When you sell a home, you claim the income when you file taxes the year you sell. The Internal Revenue Service (IRS) classifies these capital gains in two ways: short-term and long-term. In real estate, you pay short-term gains for a home owned for less than a year. You pay long-term gains, meanwhile, on homes owned for over a year. Long-term capital gains are taxed at lower rates, but short-term gains are taxed like income.

That means that if you sell within a year, short-term gains may be taxed by as much as 37 percent in 2025 for high earners. Meanwhile, long-term rates are 0 percent, 15 percent, 20 percent, and 28 percent, depending on your tax bracket. In other words, if you cash out on a home you’ve purchased within the year, your taxed will be higher than if you stayed in a home longer-term.

One of the biggest tax benefits for homeowners is the capital gains tax exclusion. This exclusion states, “If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.”

To qualify, you must meet the ownership and use guidelines. According to those guidelines, you must have owned the home for at least two out of the last five years. Also, you must have lived in the home as your primary residence for at least two out of the last five years, but that doesn’t have to be consecutive years. For example, if you purchased the home and lived in it the first year, then rented it the next three years and returned the fifth year, you would qualify for the exclusion. Additionally, you can only use this exclusion once every two years. In other words, you’ll have to wait to claim it again if you’ve already used it.

You’ll also want to be aware that while you can use the exclusion to avoid the tax, if you go over the limit, you pay taxes on the surplus. As an example, if you and your spouse sell a house and your profit is $550,000, you would pay the capital gains tax on $50,000. In North Carolina, capital gains are taxed at the same rate as income, a flat rate of 4.25 percent, in 2025.

Certain situations may allow for full or partial exceptions to these IRS rules. A full exception involves situations such as separation, divorce, or death of a spouse. If you have to transfer a home to somebody else, the IRS doesn’t consider it either a gain or loss. Another example is if you serve in the military and transfer to another location.

Other situations that could result in an exception include job relocation, health issues, destroyed homes, or business or rental income. Many of these situations may trigger a different tax rule, so it can be helpful to review IRS Publication 523 to assess your specific situation. You may also want to talk to your accountant, a tax expert, or a trusted financial advisor to better understand your scenario.

If you don’t meet the criteria, you will likely have to pay capital gains taxes on the profit of a sale of your home. However, you can reduce your taxable gain by factoring in the following.

Before you sell, talk to your advisors to discuss how you can reduce your tax burden.

Before selling your home, it’s wise to calculate potential capital gains and explore ways to minimize taxes. It’s a good idea to consult with a tax professional or an experienced real estate agent so you can better navigate your specific situation and keep more of your profit.

If you’re thinking about selling your home, let’s chat about your options and discuss how to make the most of your sale.