The Hidden Tax Surprise: What Homeowners Need to Know About Capital Gains on Home Sales

The Hidden Tax Surprise: What Homeowners Need to Know About Capital Gains on Home Sales

In today’s real estate market, many homeowners are sitting on a surprising amount of equity. That’s great news, until it comes time to sell and you realize Uncle Sam may want a share. According to Realtor.com, nearly 29 million households may owe capital gains taxes when they sell their home - even if it’s their primary residence.

So what’s going on? Let’s break it down.

What Is Capital Gains Tax?

When you sell a home for more than you paid (plus any major improvements), that difference is considered a capital gain. If you’ve owned the property for more than a year, the gain is typically taxed at long-term capital gains rates (0%, 15%, or 20%, depending on your income). If you’ve owned it for less than a year, the gain is taxed as ordinary income - potentially as high as 37% or more.

The $250K / $500K Exclusion Rule

The IRS offers a generous exclusion - but it has limits:

• $250,000 of gain is excluded if you’re single
• $500,000 if you’re married filing jointly
• You must have lived in the home for 2 of the last 5 years

That sounds like a lot, but in high-appreciation markets like the DC Metro area, it’s easier than you think to exceed those limits - especially if you’ve owned the home for 15+ years or made major upgrades.

When Could You Owe More?

You might owe capital gains tax if:

• Your home appreciated significantly beyond the IRS exclusion
• You took large tax deductions for a home office (recapture rules apply)
• You converted your home into a rental
• You didn’t meet the 2-out-of-5-year rule
• You live in a state that also taxes capital gains

Reduce Your Taxable Gain: What Counts?

Here’s the good news: You can reduce your capital gain by tracking your cost basis, which includes:

• The purchase price of your home
• Major home improvements (like renovations, new roofs, or additions)
• Certain closing costs (title, recording, etc.)

Keeping receipts and records is crucial.

Can You Avoid the Tax?

Sometimes, yes:

• Use the IRS exclusion if you qualify
• Time your sale in a low-income year
• Explore a 1031 exchange (investment properties only)
• Use self-directed retirement accounts to defer gains (if applicable)

But for most homeowners, good planning - and good record-keeping - are your best defenses.

How Many Arlington Homeowners Might Be Impacted?

• Across the U.S., roughly 79% of homeowners may face capital gains tax because their gains exceed the $250,000/$500,000 exclusion.
• Arlington County has about 239,000 residents and a homeownership rate of ~44%, equating to roughly 105,000 owner-occupied homes .
• Based on the national rate, approximately 83,000 Arlington homeowners could exceed the capital gains exemption and potentially owe taxes upon selling.

If you’re thinking about selling and you’ve owned your home for a long time, don’t let capital gains taxes catch you off guard. What feels like a huge profit might come with a tax bill - unless you prepare ahead.

Want to estimate your gain or understand your options? I’m happy to walk through it with you and connect you with a trusted tax advisor.

Reach out any time - I’m here to help you make the most of your move!

Disclaimer: I am not a CPA or tax advisor. This blog is for informational purposes only and should not be considered tax or legal advice. Please consult with a qualified CPA or tax professional regarding your individual financial situation.