Capital Gains: What will you owe when you sell?

If you've owned your home for a while, there's a good chance it's grown significantly in value—especially here in the Pacific Northwest. Selling for a big gain is exciting, but it also comes with a lesser-known challenge: capital gains tax.

Whether you're downsizing, relocating, or moving up, knowing how to minimize your capital gains can save you thousands. Let’s walk through how it works, and what smart homeowners can do to reduce their tax bill.

Capital Gains Basics

When you sell a home for more than you paid, the profit is called a capital gain. The IRS allows homeowners to exclude some of that gain if they meet these two rules:

• Ownership Test: You’ve owned the home for at least 2 years

• Use Test: It’s been your primary residence for 2 of the last 5 years

If you qualify, you can exclude:

• $250,000 of gain (single filers)

• $500,000 of gain (married filing jointly)

Anything above those limits could be taxed at the long-term capital gains rate, which for many households is 15% or 20%, depending on income.

Real Example: Big Gain, Big Tax Bill

Let’s say a couple bought their home for $400,000 and recently sold it for $1,200,000—that’s an $800,000 gain.

After applying their $500,000 capital gains exclusion, they still have a $300,000 taxable gain.

If they fall into the 15% capital gains tax bracket, their tax bill would be:$300,000 × 15% = $45,000

That’s a serious bite out of their profit.

But here’s the good news: there are ways to reduce that taxable gain—starting with your adjusted cost basis.

Adjusted Cost Basis: How It Works

Capital gains aren’t calculated using just your purchase and sale prices. Instead, they use this formula:

Sale Price – Selling Costs – Adjusted Cost Basis = Capital Gain

Let’s break down two of the most useful parts of this formula:

What Is the Adjusted Cost Basis?

Start with your purchase price, and then add in qualifying expenses like:

Costs You Can Add to Your Basis:

• Legal and title fees

• Recording fees

• Survey or appraisal fees

• Transfer/stamp taxes

• Acquisition costs

• Capital improvements (more on this below)

• Restoration after casualty losses

Example:

• Purchase price: $400,000

• Add improvements and fees: $25,000

• Adjusted basis: $425,000

• Sale price: $1,200,000

• Capital gain: $1,200,000 – $425,000 = $775,000

• Taxable gain (after $500K exclusion): $275,000

• Capital gains tax owed (15%): $41,250

That’s $3,750 less in taxes owed, just from documenting $25,000 in improvements!

What Counts as a Capital Improvement?

The IRS defines a capital improvement as something that:

• Adds value to your home

• Extends its useful life

• Adapts it to new uses

  
  

Here are common examples that can be added to your adjusted basis:

• Kitchen or bathroom remodels

• New roof, siding, or windows

• HVAC or electrical upgrades

• New flooring or insulation

• Room additions or garage builds

• Decks, patios, or driveways

• Built-in appliances or systems

• Solar panels or energy-efficient upgrades

• Extensive landscaping projects

• Security or smart home systems

Not deductible: General maintenance or repairs (like fixing leaks or repainting), unless part of a larger improvement project.

Selling Costs: Another Tax-Saving Opportunity

Another important deduction in the capital gains formula is your selling costs. These are expenses you incurred to sell the home, and they help reduce your taxable gain.

Deductible Selling Costs Include:

• Real estate agent commissions

• Escrow and title fees

• Excise taxes

• Legal or notary fees

• Paid advertising and marketing expenses

• Pre-sale inspections, staging, or cleaning (if done to sell the home)

• Fees for mortgage payoff or prepayment penalties

Just like improvements, make sure you keep receipts and closing statements, like your Settlement Statement, for documentation.

Key Takeaways

If you’ve experienced a large increase in your home’s value, you can reduce your taxable gain by:

1. Documenting capital improvements

2. Factoring in all allowable selling costs

3. Applying the IRS exclusion (if you qualify)

   
   

Talk to a CPA Before You Sell

DISCLAIMER: This article is intended for general guidance only and does not replace professional tax advice. Be sure to consult a CPA or licensed tax advisor to calculate your adjusted basis and gain accurately.

Ready to Make a Smart Move?

If you're thinking of selling your home this year, let's talk. I’ll help you plan your sale, review any improvements you’ve made, and connect you with top local professionals to make your move as smooth—and profitable—as possible.

Serving clients in King and Snohomish County

Chris Byler / 206-601-8945