The profit from selling your home for more than you paid. Often tax-free up to $250,000 (single) or $500,000 (married) when it's been your primary residence for 2 of the last 5 years.
A capital gain is the profit you make when you sell your home for more than your cost basis (purchase price plus qualifying improvements). For most homeowners, capital gains tax on a primary residence is a non-issue — the IRS exempts up to $250,000 of gain for single filers, and $500,000 for married couples filing jointly.
To qualify for the exemption, you generally need to have owned the home and lived in it as your primary residence for at least 2 of the last 5 years. Investment properties and vacation homes don't qualify.
Gains above the exemption are taxed at long-term capital gains rates (0%, 15%, or 20% depending on income). Improvements you've made to the home (renovations, additions, even some major repairs) can be added to your cost basis to reduce the taxable gain — worth keeping receipts for big projects.
Example
You bought your home for $300K, lived in it 5 years, made $40K in qualifying improvements, and sell for $500K. Your cost basis is $340K. Capital gain = $160K. As a married couple, your $500K exemption easily covers it — you owe no federal capital gains tax.
Also known as
capital gains tax, home sale profit, section 121 exclusion
Source:
IRS Topic 701