Vance Cariaga

Wed, Jun 18, 2025, 8:01 AM5 min read

One of the best financial investments you can make is the house you live in or rent out. Given soaring home values over the last decade, it’s not uncommon for homeowners in 2025 to see hundreds of thousands of dollars in profit just by selling their homes. The downside is, you might get stuck with a big tax bill when you sell your home — especially if it’s an investment property instead of the house you live in.

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The IRS and state tax agencies consider your home a capital asset, which makes avoiding a capital gains tax a bit more complicated. This means you might owe capital gains taxes on the profit from the home sale, or when reinvesting the sale of your home. Your profit is the positive difference between the sales price and the purchase price you paid when you bought the home, plus adjustments such as closing costs and realtor commissions.

There are ways to avoid these taxes, however. The one thing you need to keep in mind is that there are big differences between selling a home you live in as opposed to selling one that you either rent out or have held as an investment.

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A home is considered your principal residence when you’ve lived in it for at least two of the past five years. Fortunately, you can sell your primary residence and still avoid paying capital gains.

When you sell, you can be exempt and exclude up to $250,000 if you are single or up to $500,000 for married couples filing jointly. If you lived in the home for a total of two of the five years before you sell, that means up to $250,000 of profit is tax-free (or up to $500,000 for married couples). Keep in mind that you can file for this exemption once every two years, so it won’t work for home flipping with quick turnover.

If your profit exceeds the $250,000 or $500,000 limit, the excess is typically reported as a capital gain on Schedule D for your tax return to avoid tax liabilities. You can add your cost basis and costs of any maintenance or improvements that you made to the home to the $250,000 gain from the sale if single or $500,000 if you file a joint return.

If you do have to pay capital gains taxes on real estate, they are broken down into short- and long-term capital gains taxes. Sorting through all this can be complicated, so you’ll want to contact a tax expert to help guide you through it. For more information, visit the IRS website.