In July, we told you about a move in Congress to scrap federal capital gains tax (CGT) on the sale of owner-occupied homes ("principal residences"). But unless and until that proposal becomes law, homeowners with costly properties will likely face such a tax bill.
"If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse," says the IRS.
Even Average Homes Have CGT Liability
The problem here is that home prices across the United States have risen so quickly in the 21st century that what was intended to tax rich homeowners now captures those with much less grand homes. In the second quarter of 2025, the average sales price of houses sold in America was $512,800, according to the Federal Reserve Bank of St. Louis.
So, even a couple selling an average home would have a small liability, while a single person disposing of the same property could face a much bigger tax bill. Unless, that is, they find ways to reduce their liability. On September 13, The Wall Street Journal suggested three such ways. These won't work for everyone, but they might help some.
Please note that we at The Mortgage Research Network are not qualified to offer tax advice. You must consult a professional before relying on anything contained in this article.
CGT Reduction Strategy 1: Deduct Capital Improvements
You may think CGT is calculated by deducting the price you paid for your home from the amount you sell it for. You pay tax on the difference, less your $250,000 or $500,000 IRS exclusion.
However, it is a little more complicated than that. The costs of any capital improvements you have made to your home can be deducted from your sales price, making the gap between it and your original purchase price smaller — and reducing your CGT exposure.
But what are capital improvements? Intuit TurboTax explains:
- "A capital improvement that adds value to your home, prolongs its life, or adapts it to new uses can be added to the cost basis of your home and subtracted from the sales price to determine the amount of your profit when you sell it.
- "The cost of repairs, such as fixing a gutter, painting a room, or replacing a window pane, cannot be added to your cost basis or deducted from your sales price."
Right now, you're probably wondering whether you can find all your capital improvement receipts. It might be worth scouring your files to find as many as you can. Assuming your contractors or other suppliers are still in business, request copies of invoices you can't find. Then, maintain a file of documents concerning capital improvements so you can avoid as much CGT as possible.
CGT Reduction Strategy 2: Finance Your Buyer's Purchase
CGT Reduction Strategy 3: Make Your Home an Investment Property
The Journal explored the tax advantages of renting out your home instead of selling it: "If you rent your house rather than sell it, you will be converting it to business property. That way, you can later dispose of the property via a 1031 'like-kind' exchange, which allows you to defer the gain, rather than pay taxes immediately. Ultimately, when you sell the replacement property, you’ll be liable for capital-gains taxes then — unless you pass away, which allows your heirs to inherit the property at a stepped-up basis with no taxes due."
This sounds like smart estate planning. However, like financing your buyer's purchase, it's only open to those who don't need the proceeds of their sale as a lump sum.
