Introduction
Selling a home or investment property can result in a major financial windfall — but it can also trigger a significant capital gains tax bill. Whether you’re a homeowner or investor, understanding the rules can help you reduce your tax liability and make smarter financial decisions.

What Are Capital Gains?

Capital gains are the profits you earn from selling an asset. In real estate, this is typically the difference between your purchase price (plus improvements) and your sale price, minus certain transaction costs.

There are two types:

• Short-term (owned for under 1 year): taxed as ordinary income.

• Long-term (owned for over 1 year): taxed at 0%, 15%, or 20% depending on your income level.

Exclusions for Primary Residences

If the property is your primary residence and you’ve lived in it for at least 2 of the last 5 years, you may exclude up to $250,000 (single) or $500,000 (married) of capital gains from taxation. This can make a huge difference.

Investment Properties and Depreciation Recapture

For rental or investment properties, no exclusion applies. Worse, you may owe depreciation recapture tax — a special tax on the deductions you previously claimed for wear and tear. This is taxed at a flat 25%.

Strategies to Reduce Tax

• Use a 1031 exchange to defer taxes by reinvesting in another investment property.

• Keep accurate records of all improvements and transaction costs — they increase your cost basis.

• Time your sale strategically to minimize the income tax bracket you fall into.

Final Thoughts

Capital gains tax doesn’t have to be a surprise. With early planning and good recordkeeping, you can minimize what you owe and maximize what you keep. Always consult a tax advisor before finalizing a property sale.