Selling your home is a massive life event. It ranks right up there with getting married or finally learning how to fold a fitted sheet. But before you start browsing for your next place, have a quick talk about the tax implications.
The good news is that the tax code for a primary residence is pretty generous. However, it is also full of little traps that can turn a tax-free profit into a headache. In this article, we list the key things you need to know to keep more proceeds in your pocket.
The Big Win: The Section 121 Exclusion
Most people sell their homes and pay exactly zero dollars in federal capital gains tax. This is all because of Section 121. This rule lets you keep a huge portion of your profit without the IRS taking a cut.
The Limits
$250,000 gain exclusion if you are single or filing separately.
$500,000 gain exclusion if you are married and filing a joint return.
The 2 out of 5 Rule
To get this tax-free deal, you have to pass two tests within the five-year period ending on the day you sell:
Ownership: You owned the home for at least two years.
Use: You lived in the house as your main home for at least two years.
These two years do not have to be in a row. You could live there for a year, rent it out for a bit, and then move back for another year later on.
Doing the Math
Your taxable gain is not just the difference between what you paid and what you sold it for. To save money, you need to find your adjusted basis.
The formula looks like this:
Selling Expenses: This includes things like agent commissions, legal fees, and staging.
Adjusted Basis: This is the original price you paid plus the cost of major improvements.
Think of it this way: fixing a leaky faucet is a repair, so it does not count. But adding a bedroom, replacing the roof, or remodeling the kitchen is an improvement. These improvements increase your basis and lower your taxable profit. Make sure you keep those receipts in a safe spot.
What to Know for 2026
Tax laws are always shifting. Here are a few things that are specific to this year under the current regulations:
The SALT Cap Increase
Thanks to recent legislative updates, the State and Local Tax (SALT) deduction cap has been raised. In 2026, many homeowners can deduct up to $40,400 in state and local taxes, including property taxes, if their income is under $500,000. This is a huge jump from previous years and might make itemizing worth it for you when you file.
2026 Capital Gains Brackets
If your profit goes above the $250,000 or $500,000 limit, the rest is taxed at long-term capital gains rates. Here is where the thresholds sit for 2026:
| Tax Rate | Single Filers | Married Filing Jointly |
| 0% | Up to $49,450 | Up to $98,900 |
| 15% | $49,451 to $545,500 | $98,901 to $613,700 |
| 20% | Over $545,500 | Over $613,700 |
Things to Watch Out For
If you worked from home and claimed a home office deduction, or if you rented out a room, things get a bit more complex. The IRS will want to recapture the depreciation you took over the years. That part of your profit is usually taxed at 25 percent and cannot be hidden by the standard exclusion.
If you have to move early for a job, health reasons, or other unexpected life events like a divorce, you might still get a partial exclusion. Do not assume you owe the full tax just because you have not hit the two-year mark yet.
Your 2026 Home Sale Checklist
Check if you hit the 2 out of 5 year residency mark.
Find your records for every major renovation you have ever done.
Track your closing costs and commissions.
Look for Form 1099-S in the mail. If you get one, you must report the sale even if you owe no tax.
Let Us Help You Navigate the Sale
At TS CPA, we know that your home is more than just an asset. It represents your hard work and your future. We specialize in making sure you navigate the complexities of real estate taxation so you can move on to your next adventure with peace of mind.
If you are planning to sell this year, let’s talk before you sign the closing papers. We can help you calculate your exact basis and make sure you are taking every deduction available in 2026.
Contact us today to schedule a consultation and protect your gains.