For many households, home equity represents one of the largest sources of net worth. With home prices rising significantly over the past decade, more sellers are discovering that a move may come with an unexpected cost, capital gains tax. The good news is that with thoughtful planning, much of this tax can be reduced or avoided entirely.
Current Rules: The Section 121 Exclusion
Under current tax law, homeowners may qualify to exclude a significant portion of their gain when selling a primary residence:
Single filers: Up to $250,000 of gain excluded
Married couples filing jointly: Up to $500,000 excluded
Surviving spouses: May still use the full $500,000 exclusion if the home is sold within two years of a spouse’s death
To qualify, you must have:
Owned the home for at least two of the past five years
Used it as your primary residence for at least two of the past five years
Not used the exclusion on another home sale within the last two years
These rules help many sellers, but rising home values mean more households are now exceeding the exclusion limits. Inflation-adjusted estimates suggest the original 1997 thresholds would be roughly $505,000 for single filers and $1,010,000 for married couples filing jointly today.
Current Rules: The Section 121 Exclusion
Under current tax law, homeowners may qualify to exclude a significant portion of their gain when selling a primary residence:
Single filers: Up to $250,000 of gain excluded
Married couples filing jointly: Up to $500,000 excluded
Surviving spouses: May still use the full $500,000 exclusion if the home is sold within two years of a spouse’s death
To qualify, you must have:
Owned the home for at least two of the past five years
Used it as your primary residence for at least two of the past five years
Not used the exclusion on another home sale within the last two years
These rules help many sellers, but rising home values mean more households are now exceeding the exclusion limits. Inflation-adjusted estimates suggest the original 1997 thresholds would be roughly $505,000 for single filers and $1,010,000 for married couples filing jointly today.
Legislation Under Consideration
Several proposals in Congress aim to modernize or expand the current exclusion. While none are law today, they are important for homeowners to understand as they evaluate future moves.
Proposals to Increase the Exclusion Amounts
Multiple bills introduced in recent sessions of Congress would raise the $250,000 and $500,000 limits to better reflect current home prices. Some proposals would also index the exclusion to inflation going forward.
Proposals to Eliminate Capital Gains Tax on Primary Home Sales
Another group of proposals, including ideas discussed by the Administration in 2025, would eliminate federal capital gains tax on the sale of a primary residence entirely. These proposals have gained attention as policymakers look for ways to improve housing mobility and increase housing inventory.
Broader Housing Related Tax Discussions
Policy groups and lawmakers have also proposed:
Targeted increases for long-term homeowners
Higher exclusions for older adults
Income-based phaseouts
Simplification of the ownership and use tests
While these ideas vary widely, they reflect growing bipartisan recognition that the current rules, unchanged since 1997, may no longer reflect today’s housing market.
Planning Strategies to Reduce Capital Gains Under Current Law
Even without legislative changes, several strategies can help minimize taxes when selling a home.
Document Capital Improvements
Your taxable gain is based on the difference between your sale price and your adjusted basis, which includes the original purchase price plus qualifying improvements such as roof replacements, remodels, and additions. Good record keeping can meaningfully reduce taxable gain.
Consider Timing for Long Term Capital Gains
If you have owned the property for less than a year, waiting until you pass the one year mark may allow the sale to qualify for long term capital gains rates, which are generally lower than ordinary income tax rates.
Use Tax Loss Harvesting
If you hold investments with unrealized losses, selling those investments in the same year as your home sale may help offset taxable gains.
Explore an Installment Sale
If you do not need all the proceeds immediately, financing part of the sale for the buyer may allow you to spread the gain over several years, which could help keep you in a lower tax bracket.
Convert to a Rental and Use a 1031 Exchange
Renting the home before selling converts it to investment property, which may allow a future sale to be structured as a 1031 exchange. This defers capital gains until the replacement property is sold. If the property is held until death, heirs may receive a step up in basis that can eliminate the deferred gain.
State Taxes Still Matter
Even if federal rules change, state taxes may still apply. Some states such as Florida and Texas have no income tax, while others tax long term capital gains at ordinary income rates. In New York, combined state and local rates can exceed 10% depending on income.
What This Means for Homeowners
With home values at historic highs and tax rules potentially shifting, this is a good time to review your long term housing plans. Whether you are considering downsizing, relocating, or simply planning ahead, understanding your potential tax exposure and the strategies available to reduce it can make a meaningful difference.