If We Sell Our Home, How Much of the Gain Are We Actually Going to Owe Taxes On?
Selling a home represents more than a move for many high-net-worth families. It may coincide with retirement, a relocation, purchasing a second home, or simply the next chapter of life.
A question we hear from clients going through this process is:
"How much of the gain are we actually going to owe taxes on?"
The answer depends on several factors, and for many homeowners, it may be less than expected. Understanding how the rules work can help you make informed decisions before your home goes on the market.
Start With the Home Sale Exclusion
If you're selling your primary residence, the IRS allows many homeowners to exclude a significant portion of the gain.
Generally, you may qualify to exclude:
Up to $250,000 if you're single.
Up to $500,000 if you're married filing jointly.
To qualify, you generally must have owned and lived in the home as your primary residence for at least two of the last five years, and you cannot have claimed the exclusion on another home sale during the previous two years.
For example, suppose you purchased your home for $700,000 and sold it for $1.4 million. At first glance, it appears you've realized a gain of $700,000.
If you're married and qualify for the $500,000 exclusion, only the remaining gain may be subject to capital gains tax, assuming no other adjustments apply.
That calculation, however, is often just the starting point.
Your Cost Basis May Be Higher Than You Think
Many homeowners assume their cost basis is simply what they originally paid for the property. In reality, qualifying capital improvements can increase your basis and reduce the taxable gain.
Examples include:
Kitchen or bathroom remodels
Room additions
New roofing
HVAC replacements
Permanent landscaping
Swimming pools
Major plumbing or electrical upgrades
Routine maintenance, such as painting or minor repairs, generally does not increase your basis.
Suppose the homeowners in the previous example invested $180,000 in qualifying improvements over the years. Their adjusted basis increases from $700,000 to $880,000, reducing the gain to $520,000 before other adjustments.
That single step may significantly change the amount ultimately subject to tax.
Selling Costs Also Reduce the Gain
The purchase price and sale price are only part of the equation.
Certain costs directly related to selling the home may also reduce the taxable gain, including:
Real estate commissions
Attorney fees
Title and escrow fees
Certain closing costs
If selling expenses totaled $70,000, the gain in our example would decrease even further before applying the home sale exclusion.
For homeowners who have owned their property for many years, gathering documentation for improvements and selling expenses can have a meaningful impact on the final calculation.
A Home Sale Can Shape More Than This Year's Tax Return
Selling a home often creates one of the largest cash events in a family's financial life. The proceeds may support your next home purchase, retirement income, investment strategy, charitable giving, or legacy planning.
Because of that, the timing of a home sale can influence other financial decisions.
For example, the year of the sale may also be an opportunity to:
Evaluate whether Roth conversions fit into your long-term tax strategy.
Coordinate charitable gifts in a higher income year.
Reposition investments to better reflect your current goals if they have shifted.
Review estate planning strategies after a significant increase in liquidity and change in assets.
Consider how the proceeds may support children, grandchildren, or future philanthropic goals.
When viewed together, these decisions can provide greater clarity than addressing each one separately. A home sale may last only a few weeks, but the financial decisions surrounding it often influence the years that follow.
Bringing It All Together
The better question isn't simply, "How much tax will we owe?"
It's also, "How does this sale fit into everything else happening in our financial lives?"
Understanding the home sale exclusion, documenting capital improvements, accounting for selling costs, and evaluating the sale alongside other financial decisions can provide valuable clarity before moving forward.
At Morella& Morella, we believe the strongest financial decisions come from seeing how each piece connects. A home sale is rarely an isolated event. It is often part of a broader financial story, and coordinating tax planning with investment, retirement, and legacy considerations can help support thoughtful decisions at every stage of life.
