What Are the Capital Gains Tax Brackets for 2025?
Your home sale is likely tax-free. But in the event that it’s not, follow this guide to short and long-term capital gains tax brackets.
Rejoice in this: Rarely do homeowners have to pay taxes on the money they make from selling their house. The IRS allows you to exclude up to $250,000 (or $500,000 if you’re married) of “capital gain” on your main home, which means most sellers are covered.
But it’s possible you will owe taxes on your home sale. Perhaps you moved before meeting the two-year use test or earned more than the exclusion cap due to skyrocketing prices. Whatever the case, the next question in your mind is — what tax rate do I fall under?
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Your tax rate depends on several factors, like how long you owned the property, your income level, and your filing status. We’ve scoured over the most recent IRS instructions on capital gains and had accounting expert A.J. Gross, CPA, EA, Founder and President of ALG Tax Solutions, break it all down for us into this handy guide on capital gains tax brackets for home sellers.
Read on to find out your rate (as of 2025 tax rules), and how to calculate your taxes!
Editor’s Note: The information in this blog post is meant to be used as a helpful guide and for educational purposes only, not legal or tax advice. If you need help with a tax question, please consult a skilled CPA.
Let’s start with the basics: What is a capital gain?
A capital gain, or capital loss, is the profit or loss from the sale of a “capital asset.”
Any asset that is not used in a taxpayer’s trade or business constitutes a capital asset. This means most of what you own (personal or investment property) can be considered a capital asset with a few exceptions. This includes your house, stocks or bonds, cars, or boats. Sell one of these items, and you’ll find yourself with a capital gain on your hands (taxed at capital gains tax rates).
Capital gains differ from ordinary income or ordinary gains, which is money earned from working — like salaries, bonuses, tips, interest income, and gains from your business activities. Ordinary income is taxed at ordinary marginal income tax rates.
For the purposes of this article, we are going to focus on your house as the capital asset in question and look at the implications of capital gains for home sellers. If you are interested in the treatment of capital gains for other types of capital assets, the IRS has publications on assets such as investments or collectibles you can refer to.
How do you calculate a capital gain on your home sale?
There are two parts to the capital gain calculation — let’s go through each one as it applies to the sale of your house.
- Calculate the adjusted basis of your house (aka, the purchase cost of your house after adjusting for various tax-related items).
Formula: Adjusted Basis = Original Cost + Capital Improvements – Depreciation
- Original cost: This refers to the purchase price of the house. It includes not only the actual cost of the property but also any settlement fees, closing costs, and other expenses directly associated with the purchase.
- Capital improvements: These are the costs incurred for significant enhancements or improvements made to the property that increase its value, prolong its useful life, or adapt it to new uses. Examples of capital improvements include adding a new room, remodeling the kitchen, or replacing the roof. The costs of these improvements can be added to the adjusted basis.
- Depreciation: If the property has been used for business or rental purposes, it may be subject to depreciation. Depreciation is the reduction in value over time due to wear, tear, and obsolescence. The amount of depreciation is determined by the applicable tax laws and methods. However, if the property is your primary residence, depreciation does not apply.
By subtracting the depreciation from the original cost and adding any capital improvements, you can calculate the adjusted basis of the house. It’s important to note that this formula provides a general guideline, and you should consult with a tax professional or refer to the specific tax laws in your jurisdiction for accurate calculations and any additional considerations.
- Calculate the capital gain, or profit, on the sale of your home.
Formula: Capital Gain = Selling Price – Adjusted Basis – Selling Expenses
- Selling price: This refers to the amount for which you sell your home.
- Adjusted basis: The adjusted basis of the home is calculated using the formula mentioned earlier. It represents the original cost of the home plus any capital improvements minus depreciation.
- Selling expenses: These are the costs associated with selling the home. They can include real estate agent commissions, legal fees, advertising expenses, and any other fees directly related to the sale of the property.
By subtracting the adjusted basis and selling expenses from the selling price, you can calculate the capital gain or profit on the sale of the home. If the result is a positive value, it represents a capital gain, while a negative value indicates a capital loss.
In other words, if you sold your house for more than its adjusted basis, you have a capital gain. If you sold it for less than its adjusted basis, you have a capital loss. Capital gains on the sale of a primary residence may be subject to certain tax exemptions or exclusions, depending on your jurisdiction and specific circumstances.
We’ll talk about how to treat capital gains first and finish off with how to use your capital losses to your advantage.
