🎯 1. What is Capital Gains Tax?
Capital gains tax is a levy on the profit you make when selling an asset for more than you paid for it. In real estate, this applies when you sell property at a gain.
Capital Gain
The profit from selling property = Sale Price - Cost Basis
Cost Basis
Purchase price + improvements + buying/selling costs
Tax Liability
Federal + State + NIIT (if applicable)
📝 Simple Example
⏱️ 2. Short-term vs Long-term Capital Gains
The length of time you own the property dramatically affects your tax rate:
Holding Period Tax Impact
Short-term (≤12 months)
- Taxed as ordinary income
- Rates: 10% to 37%
- No preferential treatment
- Higher tax burden
Long-term (>12 months)
- Preferential tax rates
- Rates: 0%, 15%, or 20%
- Based on income level
- Significant tax savings
Pro Tip
If you're close to the 12-month mark, it may be worth waiting to qualify for long-term rates. The tax savings can be substantial!
🧮 3. Calculating Your Cost Basis
Your cost basis determines how much gain is subject to tax. Here's what to include:
✅ Include in Cost Basis
- Purchase Price: Original price paid
- Closing Costs: Title insurance, attorney fees, recording fees
- Major Improvements: Kitchen remodels, roof replacement, additions
- Capital Improvements: New HVAC, flooring, windows
- Legal Fees: For defending title or zoning issues
- Survey Costs: Property boundary surveys
❌ Don't Include in Cost Basis
- Regular Maintenance: Painting, lawn care, cleaning
- Repairs: Fixing broken appliances, plumbing leaks
- Utilities: Monthly electric, gas, water bills
- Property Taxes: Annual property tax payments
- Insurance: Homeowner's or rental insurance
- Mortgage Interest: Interest on loans
📋 Record Keeping Best Practices
Organize Documents
Keep all receipts, contracts, and improvement records in one place
Photo Documentation
Take before/after photos of improvements for IRS documentation
Digital Backup
Scan and store digital copies in cloud storage
📊 4. 2025 Capital Gains Tax Rates
Long-term Capital Gains Rates (2025)
| Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0 - $47,025 | $0 - $94,050 | $0 - $63,000 |
| 15% | $47,026 - $518,900 | $94,051 - $583,750 | $63,001 - $551,350 |
| 20% | Over $518,900 | Over $583,750 | Over $551,350 |
💰 Additional 3.8% NIIT
High earners may owe an additional 3.8% Net Investment Income Tax:
- Single: Income over $200,000
- Married Filing Jointly: Income over $250,000
- Married Filing Separately: Income over $125,000
🧮 Calculate Your Exact Rate
Use our calculator to determine your specific tax liability based on your income and filing status.
Calculate Now →🏠 5. Primary Residence Exemption
Save Up to $500,000 in Taxes!
The primary residence exemption is one of the biggest tax breaks available to homeowners.
Single Taxpayers
Tax-free capital gains
Married Filing Jointly
Tax-free capital gains
📋 Qualification Requirements
Primary Residence Test
The property must have been your main home for at least 2 of the last 5 years before selling.
2-Year Rule
You can only use this exemption once every 2 years.
Married Couples
Both spouses must meet the use test, but only one needs to meet the ownership test.
🎯 Strategic Planning
Converting Investment Property
You can convert a rental property to your primary residence to potentially qualify for the exemption. Requirements:
- Live in the property as your main home for at least 2 years
- Can't have used the exemption in the previous 2 years
- May still owe tax on depreciation recapture
Example Conversion Strategy:
Sarah bought a rental property in 2018 for $300K. In 2025, it's worth $500K. She moves in for 2 years, then sells in 2027 for $550K. She can exclude up to $250K of the gain, saving approximately $37,500 in federal taxes.
🔄 6. 1031 Like-Kind Exchanges
A 1031 exchange allows you to defer paying capital gains tax by reinvesting the proceeds into a similar property.
Tax Deferral
Defer all capital gains tax to a future sale
Portfolio Growth
Use tax money to invest in larger properties
Property Upgrade
Move from smaller to larger investment properties
📐 Key Rules & Timelines
Sale of Original Property
Property must be held for investment or business use
45-Day Rule
Identify replacement properties within 45 days
180-Day Rule
Complete purchase of replacement property within 180 days
Important Limitations
- Does NOT apply to primary residences
- Properties must be "like-kind" (real estate for real estate)
- Must use a qualified intermediary
- Strict timeline requirements
- Equal or greater value requirement
Ready to Calculate Your Capital Gains Tax?
Use our free calculator to get an accurate estimate of your tax liability based on your specific situation.