How to reduce capital gains tax on your home sale

When discussions surface about removing capital gains taxes on home sales—as former US President Donald Trump hinted at again in 2025—it sparks interest across both sides of the political aisle. For homeowners who’ve built up decades of equity, the idea of pocketing every cent from a home sale is understandably attractive.

But legislative reform is slow, uncertain, and may never materialize. The good news? There are already legal, IRS-approved ways to reduce your capital gains tax bill on home sales—and most of them don’t require a single policy change. They just require better planning.

In this article, we’ll walk through how capital gains on homes are calculated, who’s most likely to be affected, and how to reduce your tax bill using cost basis adjustments, timing strategies, and records that most sellers overlook until it’s too late.

When you sell a primary residence in the US, you can exclude up to $250,000 in capital gains if you’re single, or up to $500,000 if married and filing jointly. That might seem like plenty. But in many cities—particularly those where housing values have tripled since the early 2000s—it’s no longer a high bar to clear.

A home bought for $400,000 in 1999 and sold for $1.2 million today represents an $800,000 gain. Even if you're married, $300,000 of that may be taxable, depending on your filing status and how much of the gain is eligible for the exclusion. If you're in the 15% capital gains tax bracket and subject to the 3.8% Net Investment Income Tax, that could mean nearly $57,000 in taxes—before accounting for state levies.

The reason this issue is gaining urgency is twofold. First, a growing share of homeowners—particularly long-time owners and retirees—are starting to exceed those thresholds. Second, many people assume they won’t owe capital gains tax at all because their home is their “primary residence.” That assumption can lead to unpleasant tax surprises.

Most short-term homeowners are still in the clear. According to a 2025 study from the National Association of Realtors, only about 10% of married couples and 34% of single homeowners are expected to exceed the exclusion thresholds this year.

The risk is highest for:

• Older homeowners who’ve owned their property for 15 years or more
• Residents of high-growth housing markets such as San Francisco, Austin, Miami, Boston, and New York
• Individuals selling homes that were previously rentals or only partially used as a primary residence
• Homeowners who’ve done substantial renovations without documenting costs

This is where planning becomes critical. If you’re in a market where prices have grown significantly—or you’ve built substantial value through home improvements—understanding how your capital gains are calculated can help you stay below the taxable threshold.

Your capital gain on a home sale is the difference between the final sale price and your adjusted cost basis. That phrase—adjusted cost basis—is where the tax-saving potential lies.

Step 1: Start with your original purchase price

If you bought your home for $300,000 in 2002, that’s your base.

Step 2: Add closing costs and fees

This includes legal fees, title fees, and other transactional costs from when you purchased the home.

Step 3: Add qualifying capital improvements

This is the most important—and overlooked—step. Major renovations that add to your home's value can be added to your cost basis. That means they reduce your taxable gain. So if you added a $75,000 kitchen, $30,000 landscaping, and $20,000 solar panels, your cost basis could be increased by $125,000, bringing it to $425,000.

Now, if you sell that home for $850,000, your capital gain is $850,000 – $425,000 = $425,000. If you’re single, you’d be taxed on $175,000 (the portion above the $250,000 exclusion). If you’re married, no tax would be owed under current law.

Let’s dive into what counts as a cost basis adjustment—and how to document it properly.

What counts:

New rooms or home additions

Kitchen and bathroom remodels

Energy-efficient upgrades (solar panels, insulation, HVAC replacement)

New plumbing, electrical systems, or roof

Swimming pools, fences, decks, patios

Permanent landscaping, such as retaining walls or irrigation systems

What doesn’t count:

Repairs or replacements of existing systems (like fixing a broken faucet)

• Cosmetic improvements like painting
• Routine maintenance (lawn mowing, cleaning, pest control)

The IRS draws a clear line between “capital improvements” and “repairs.” Capital improvements increase the home’s value, extend its life, or adapt it to new uses. Repairs just maintain it.

Many homeowners remember their remodels. Fewer have the paperwork to prove them. In the absence of invoices, receipts, or contractor agreements, the IRS may reject your claimed basis adjustment.

You should keep:

• Contractor invoices
• Credit card statements or bank transfers
• Building permits (especially for large projects)
• Before-and-after photos (not required, but useful contextually)

Even if your sale is years away, start a dedicated folder—digital or physical—for every home improvement you make. It’s the financial version of muscle memory: easy to ignore until it costs you dearly.

Ownership structure can affect capital gains calculations in meaningful ways:

Joint ownership (not married):

Each owner can claim a $250,000 exclusion. So two unmarried individuals co-owning a home could exclude up to $500,000—similar to a married couple—as long as both meet the ownership and use tests.

Inherited property:

When you inherit a home, you receive a “stepped-up basis.” That means your cost basis is the home’s market value on the date of the decedent’s death—not what they originally paid. So if your parents bought the house for $200,000, but it was worth $800,000 when you inherited it, your gain starts from $800,000.

This rule eliminates most capital gains on inherited properties—unless the property appreciates further before you sell.

For higher-income earners, the tax bill can be even steeper. If your modified adjusted gross income (MAGI) is over $200,000 (single) or $250,000 (married), you may owe an additional 3.8% Net Investment Income Tax (NIIT) on the portion of your home sale gain that exceeds the exclusion. That means if you're in the 20% capital gains bracket and also owe the NIIT, your marginal tax rate on that portion of the gain could be 23.8%. This makes cost basis documentation and proactive planning even more essential.

If you’re planning to sell within the next one to five years, here’s what financial planners recommend:

1. Estimate your gain now. Use conservative price forecasts and calculate your adjusted cost basis.
2. Gather documentation. Locate and organize improvement receipts going back as far as possible.
3. Time the sale carefully. If your income will be unusually high in a given year, delaying the sale could drop you into a lower tax bracket.
4. Consult a planner or tax advisor. Especially important if the home was rented out, partially used as a business, or owned jointly.

Good records now could be worth tens of thousands later.

Although proposals to remove or raise the capital gains exclusion on home sales surface regularly, they rarely become law. Even if one does pass, it’s unlikely to be retroactive. You cannot rely on reform to reduce your tax burden. But you can rely on the existing tax code—which already provides ways to lower what you owe, if you know how to apply them.

As Catherine Valega, a Boston-based certified financial planner and IRS enrolled agent, puts it: “Regardless of whether the law changes, keep those receipts.”

For most people, a home is the largest single asset they’ll ever own. But unlike retirement accounts or brokerage portfolios, it’s often managed emotionally, not financially. And that’s the trap. By treating your home as an investment—and tracking its financial performance over time—you gain control over when and how you’re taxed. You’re no longer just reacting to the sale. You’re planning for it.

Capital gains tax on home sales doesn’t have to be punitive. But it does require attention. Keep your records. Know your numbers. And when in doubt, ask early—not after the ink is dry on the deal. Because at the end of the day, the smartest tax move isn’t waiting for a new law. It’s using the one we already have—correctly.