Capital Gains Tax on Selling a House in 2026: What Is Excluded and What Is Taxed

The exclusion and the two-of-five-years test

Section 121 lets you exclude up to $250,000 of gain from the sale of your main home, or $500,000 if you are married and file jointly. To qualify you must have owned the home and used it as your principal residence for at least 2 of the 5 years before the sale.

The two years do not have to be consecutive, and ownership and use can be met in different periods within the 5-year window.

The exclusion is automatic if you meet the tests; you do not elect it. For gain beyond the exclusion on a high-value home, see home sale gain over the exclusion.

How to calculate the gain on your house

Gain is the amount realized minus adjusted basis. The amount realized is the sale price minus selling costs such as agent commissions, title fees and transfer taxes.

Adjusted basis is what you paid, plus closing costs on the purchase, plus capital improvements (a new roof, an addition, a remodeled kitchen), minus any depreciation you claimed, for example for a home office or a rented room. Repairs and maintenance, such as repainting, do not add to basis. The approach is explained in adjusted basis.

Example: you bought for $400,000 with $8,000 of closing costs, added $60,000 of improvements, and sell for $1,300,000 paying $78,000 in costs. Adjusted basis is $468,000. Amount realized is $1,222,000. The gain is $754,000. A joint filer excludes $500,000 and has $254,000 to report.

What tax applies to the gain above the exclusion

Gain above the exclusion is a long-term capital gain if you owned the home more than one year.

It is stacked on top of your other income and taxed at 0%, 15% or 20% in 2026, using the Revenue Procedure 2025-32 thresholds: 0% up to $98,900 of taxable income joint ($49,450 single), 15% up to $613,700 joint ($545,500 single), and 20% above.

The 3.8% net investment income tax applies to the taxable gain if your modified AGI is over $250,000 joint or $200,000 single (IRC 1411); the excluded gain is not subject to it.

In the first example the couple sells at an $850,000 gain, excludes $500,000, and reports $350,000. With $120,000 of other income, the federal tax is $59,195 in Texas.

A single California seller with $180,000 of other income and a $600,000 gain reports $350,000 after the $250,000 exclusion and pays $99,622 combined federal and state ($52,500 federal, $12,540 NIIT and $34,582 California). A single Florida seller with a $450,000 gain and $100,000 of other income pays $33,800 on the $200,000 above the exclusion.

Depreciation and other gain the exclusion does not cover

Depreciation claimed on a home office, a rented room or an accessory unit after May 6, 1997 is not excluded (IRC 121(d)(6)). That gain is taxed as unrecaptured section 1250 gain at up to 25% in 2026.

A couple that depreciated $200,000 on a rented part of their home and sells at a $700,000 gain still excludes the remainder up to $500,000, but the $200,000 is taxable: $46,888 of federal tax in Texas.

Gain allocated to periods of nonqualified use, such as years the home was a rental before you moved in, is also taxable (IRC 121(b)(5)). See depreciation recapture.

When the exclusion does not apply

You do not get the exclusion for a second home, an investment property or a vacation house that was never your main home; those sales follow second home or rental property rules.

You also lose it if you used it on another home sold within 2 years, or if you acquired the house in a like-kind exchange within the previous 5 years (IRC 121(d)(10)).

A rental that you later convert to a main home and live in for 2 of 5 years can qualify, subject to the depreciation and nonqualified-use limits above. If you inherited the house, the heir gets a stepped-up basis, which usually removes most of the gain (see inherited property).

Ways to reduce tax on a house sale above the exclusion

Documenting every capital improvement raises basis dollar for dollar. Selling costs reduce the amount realized. Timing the sale in a year with lower other income may move part of the taxable gain into the 15% bracket instead of 20% (2026 thresholds).

If you are close to the two-year mark, waiting can turn a taxable sale into a fully excluded one.

For a sale where the taxable portion is large, an installment sale to a buyer who pays over several years spreads the gain across tax years, and a section 121 and 1031 combination can apply when the property was part residence, part rental.

How much tax would you owe? Run your own numbers

Frequently asked questions