Capital Gains Tax Explained for Home Sellers (2026 Guide)

Understand how capital gains tax works when you sell a home — including federal tax rules, primary residence exclusions, how basis is calculated, and special inherited property considerations for 2026.

Introduction — What Is Capital Gains Tax and Why It Matters

When you sell your home — whether it’s your primary residence, a second home, or an investment property — the profit you make is called a capital gain. U.S. tax law may require you to pay federal capital gains tax on that profit if certain conditions are met. Capital gains tax isn’t a Florida state tax, because Florida does not impose state income or capital gains taxes thanks to no personal income tax.

In this guide, we’ll walk through what capital gains tax means for home sellers, how gains are calculated, key exclusions you may qualify for, and special situations involving inherited property. However, this blog is for general knowledge. To get additional information regarding this topic, I recommend you get professional advice from your prefered CPA.

1. How Capital Gains Are Calculated When You Sell a Home

Capital gain is the difference between what you sell your home for and your adjusted tax basis in the property.
Your adjusted basis is typically your original purchase price plus the cost of eligible capital improvements (like a new roof or significant renovation), minus certain deductions.

Example:
If you bought a house for $300,000, made $50,000 of qualifying improvements, and sold it for $450,000, your gain would be:

• Sale price: $450,000

• Adjusted basis (purchase + improvements): $350,000

• Capital gain: $100,000

You may then owe federal tax only on that gain — after applying any available exclusions. 

2. Primary Residence Exclusion — Up to $250K/$500K

One of the most valuable tools for home sellers is the Section 121 home sale exclusion. If you meet certain requirements, you can exclude a large portion of your capital gain from taxation.

What you can exclude:

• Up to $250,000 of gain if you file taxes as a single person

• Up to $500,000 if you’re married and file jointly

To qualify:
✔ You owned the home for at least 2 of the 5 years before the sale
✔ You used the home as your primary residence for at least 2 of the 5 years before the sale

The ownership and use tests do not need to be concurrent.

This exclusion is one of the main reasons many home sellers pay little or no federal capital gains tax when selling their primary residence.

3. Federal Capital Gains Tax Rates for Homes

If your gain exceeds the Section 121 exclusion amounts, you may owe federal capital gains tax on the excess. Capital gains tax rates depend on your income level and how long you owned the property:

• Long‑term capital gains tax rates (property owned over 1 year): typically 0%, 15%, or 20%, depending on your taxable income.

• Short‑term capital gains (owned 1 year or less) are taxed at ordinary income tax rates (higher).

Important: Even if the tax rate on gains is 0% because of income level, you still must report the sale on your federal tax return and claim the exclusion, if applicable. IRS

4. Special Considerations for Inherited Property

When you inherit a property — for example, from a family member — U.S. tax law often gives you a stepped‑up basis. This means your cost basis resets to the fair market value of the home on the date of the previous owner’s death. 

What this can mean for you:

• If the inherited home is worth $800,000 at the date of death and you later sell it for $820,000, you’ll owe capital gains tax only on the $20,000 gain since inheritance.

• If you sell immediately near the inherited value, you may owe little or no capital gains tax. 

This “stepped‑up basis” often dramatically reduces capital gains tax on inherited property.

5. Florida’s Tax Advantage — No State Capital Gains Tax

A major benefit for home sellers in Florida is that the state imposes no income or capital gains tax. This means you’ll only deal with federal capital gains tax — not an additional state tax — on the profit from a home sale.

This tax‑friendly environment is one reason many people choose to live and sell property in Florida.

6. Reporting the Sale on Your Tax Return

Even if you qualify for the home sale exclusion, the IRS typically requires you to report the sale:

• Use Form 8949 to list the sale

• Use Schedule D with your Form 1040 to report capital gains or losses

• Include any exclusion or special circumstances (primary residence, inherited property) on your return

Reporting correctly helps ensure compliance and avoids future issues.

7. Strategies to Reduce or Delay Capital Gains Tax

Depending on your financial goals, some federal strategies may help reduce or defer capital gains taxes (note: these strategies have specific requirements and often require professional tax guidance):

• 1031 Exchange: Common for investment property — allows deferral of capital gains by reinvesting proceeds into another qualifying property. (Not directly applicable to primary residences.)

• Timing your sale: Holding property longer may qualify for long‑term rates and lower tax rates.

• Capital improvements: Some improvements add to your adjusted basis, reducing taxable gain.

Conclusion — Capital Gains Tax Matters, But You Have Tools

Capital gains tax is an important consideration whenever you sell real estate — even in a state like Florida where there’s no state income tax. Understanding how gains are calculated, how exclusions work, and special rules like stepped‑up basis can help you plan and potentially save money on taxes.

If you’re thinking about selling your home and want personalized guidance about how capital gains tax might impact your net proceeds, consider working with a qualified tax professional or CPA and for your home selling process, contact me HERE.

FAQ — Capital Gains Tax and Home Sales

Q: Do I always owe capital gains tax when I sell my home?
A: Not always. If your profit falls below the Section 121 exclusion amount ($250K/$500K) and you meet ownership/use tests, you may owe no federal capital gains tax.

Q: Does Florida charge state capital gains tax?
A: No — Florida does not impose a state capital gains or income tax.

Q: What is a stepped‑up basis?
A: A stepped‑up basis resets your inherited property’s cost basis to its market value at the owner’s date of death, often reducing taxable gain on sale. 

Q: Can I exclude capital gains if I lived in the home part of the time?
A: You must meet the IRS’s ownership and use tests (2 of the last 5 years) to qualify for the home sale exclusion. 

Q: Does selling a second home change how capital gains tax applies?
A: Yes — second or investment homes do not qualify for the same exclusion and are typically taxed at federal long‑term capital gains rates.