Summary of What This Blog Covers
- Learn how to avoid capital gains tax using the $250K/$500K home sale exclusion.
- Discover which home improvements can reduce your taxable gain.
- Understand how divorce affects home sale taxes and exclusion limits.
- Get tips for avoiding surprises from rentals, business use, or foreign accounts.
If you’re getting ready to sell your home—whether to upgrade, downsize, relocate, or simply move on—you might be expecting a smooth and celebratory experience. And it should feel that way.
But if you don’t handle the sale correctly from a tax perspective, that joy can be quickly overshadowed by an unexpected IRS bill. The equity you’ve spent years building could be reduced by a capital gains tax if you’re not careful and in some cases, significantly so.
At Insogna CPA, we’ve worked with countless homeowners, entrepreneurs, and real estate investors across the country, especially here in Austin, Texas, helping them sell with clarity and strategy. Our goal? To keep their money in their hands and to help them understand the tax implications of one of life’s biggest financial transactions.
Let’s dive into the strategies, details, and insights that can protect your wealth and turn your home sale into a true financial win.
Why You Could Owe Taxes When Selling a Home
When you sell your home, the IRS is going to look closely at how much money you made on that sale. This is referred to as your capital gain, the profit you make after subtracting your purchase price and other eligible costs from your sale price.
Here’s the basic formula:
Capital Gain = Sale Price – (Purchase Price + Cost of Improvements + Selling Expenses)
If that number is significant, the IRS may consider it taxable income unless you qualify for the home sale exclusion.
And if you’ve owned your home for more than a year, it falls into the long-term capital gains category. This is usually taxed at 0%, 15%, or 20%, depending on your income. For high-income earners, a 3.8% Net Investment Income Tax (NIIT) may also apply. This is where the tax bill can grow quietly and quickly.
The Capital Gains Tax Exclusion: What It Is and Who Qualifies
The good news? The IRS does offer a very generous exclusion for homeowners who meet specific criteria.
If the home you’re selling is your primary residence, and you meet the timing requirements, you may be able to exclude:
- Up to $250,000 of capital gain from taxes if you are a single filer
- Up to $500,000 if you are married and filing jointly
This means that if your gain is within those limits, you may not owe a penny in federal capital gains tax. However, you must pass three key tests to qualify for this exclusion:
1. Ownership Test
You must have owned the home for at least two years in the five years leading up to the date of sale.
2. Use Test
You must have lived in the home as your primary residence for at least two of those five years.
3. Frequency Test
You haven’t used the exclusion on another home sale in the last two years.
If you meet all three, you’re eligible. If you don’t, there are partial exclusions available under certain circumstances like job relocation, health issues, or unforeseen hardship. A knowledgeable tax preparer or CPA in Austin, Texas can help determine your eligibility in more complex cases.
What Happens If Your Gain Exceeds the Exclusion?
Let’s say you’re married and sold your Austin home for $950,000 after buying it for $400,000. That’s a $550,000 gain. You can exclude up to $500,000, but the remaining $50,000 is taxable as a long-term capital gain.
If you’re in a higher tax bracket, that $50,000 could be taxed at 20%, plus the 3.8% NIIT, bringing your total tax liability on that amount to as much as $11,900.
This is why tax strategy matters. Timing the sale for a lower-income year or reinvesting proceeds strategically could potentially reduce or even eliminate that burden.
How Home Improvements Can Reduce Your Tax Liability
Here’s something many homeowners don’t realize: you can increase your cost basis and reduce your taxable gain by adding the value of certain home improvements.
But not all upgrades qualify. Only those that materially add to the value, extend the life, or adapt the home to new uses can be included in your cost basis.
Qualifying Improvements Include:
- Complete kitchen or bathroom remodels
- Roof replacement or new HVAC systems
- Room additions or basement finishes
- Adding energy-efficient windows or solar panels
- Constructing a deck, patio, or garage
- Installing accessibility features such as wheelchair ramps
These upgrades help raise your adjusted basis and reduce your gain.
What Doesn’t Count:
Routine maintenance like painting, landscaping, or replacing broken fixtures usually does not qualify. Those are considered normal upkeep.
Real Example:
If you bought your home for $400,000 and invested $60,000 in capital improvements, your new adjusted basis is $460,000. If you sell for $850,000, your gain is now $390,000 not $450,000 and you may fully avoid any capital gains tax if you qualify for the exclusion.
Be sure to keep meticulous records: invoices, contracts, receipts, permits, and even before-and-after photos. The IRS requires documentation if you’re audited, and your memory won’t cut it.
How Divorce Affects Home Sale Taxes
Divorce changes the tax equation significantly, especially if real estate is involved. Here are the most common scenarios:
Selling Before the Divorce is Final
If you and your spouse sell the home while still married and filing jointly, you’re eligible for the full $500,000 exclusion. That’s often the most tax-efficient option.
Selling After Divorce
If only one person keeps the house and later sells it, the maximum exclusion drops to $250,000 for that individual. This can mean much more of the gain is subject to tax if the market continues to appreciate.
Transferring the Home During Divorce
A home can be transferred from one spouse to the other as part of the divorce settlement without triggering capital gains tax. However, the spouse who receives it also takes over the original cost basis, which could lead to a much larger taxable gain in the future.
Working with a tax accountant in Austin, Texas who specializes in divorce-related planning is critical. These decisions carry long-term consequences.
What if the Home Was a Rental or Business Property?
If you ever rented out the home or used part of it for business, the exclusion rules still apply but with limitations.
For example:
- If part of the home was used as a home office, that portion may not be eligible for the capital gains exclusion.
- Any depreciation taken on the property (while it was a rental) must be recaptured and taxed when you sell.
A certified CPA or tax advisor near you can help allocate these costs correctly and help you minimize depreciation recapture.
Other Tax Considerations: State Taxes, FBAR, and More
State Taxes
Many states, including Texas, do not charge capital gains tax on personal property. However, if you are moving from or selling a property in a state that does like California or New York, you’ll want to factor in state-level taxes.
FBAR and Foreign Assets
If the proceeds from your sale move into a foreign bank account and the total exceeds $10,000 at any point during the year, you may have to file an FBAR (Foreign Bank Account Report). Failing to file comes with steep penalties.
This is where working with a taxation accountant or enrolled agent who understands international compliance is crucial.
Your Pre-Sale Tax Strategy Checklist
Before you list your home, make sure you’ve covered all your bases:
- Confirm your eligibility for the capital gains tax exclusion
- Calculate your projected gain using real numbers
- Identify and document all qualifying improvements
- Understand your income level and tax bracket
- Plan the timing of the sale for optimal tax treatment
- Review implications of shared ownership or divorce
- Determine if any business or rental use affects your exclusion
- Consult with a trusted CPA firm in Austin, Texas
- Avoid relying solely on DIY tax software or online calculators
- Create a tax strategy plan that aligns with your larger financial goals
Why Proactive Planning Matters
Waiting until tax season to think about this is like trying to install a seatbelt after the crash. Once the sale is done, your options become far more limited.
At Insogna CPA, we believe in anticipatory service. That means we guide you before major transactions, helping you make decisions that optimize tax outcomes while aligning with your personal and business vision.
Final Thoughts: Selling a Home Should Build Wealth, Not Trigger Regret
You’ve worked hard for your equity. You’ve put love, time, and resources into your home. You deserve to walk away from your sale empowered, not penalized.
By partnering with a knowledgeable Austin CPA firm, you can reduce your stress, avoid costly mistakes, and make the most of the opportunity.
Our team at Insogna CPA doesn’t just file returns. We provide tax help, strategic guidance, and the kind of white-glove service that makes you feel like you’re more than just a number. Because you are.
Let’s Make Your Next Move a Strategic One
If you’re preparing to sell your home or even just starting to think about it, now is the perfect time to start the conversation.
Contact Insogna CPA today for a personal consultation with a certified CPA in Austin, Texas. We’ll help you create a smart, simple, and fully compliant tax plan for your home sale so you walk away with confidence, clarity, and more money in your pocket.