If you drive a car, I’ll tax the street; If you try to sit, I’ll tax your seat.  I’m the taxman!

Capital Gains. This is a topic I cover in depth with sellers every day. I promise to break it down in a way that’s easy to understand here.

Let’s say you’ve owned your home for a while and it’s time to move on to your next adventure. Maybe it’s due to a downsize or a job change. Whatever the reason, selling your home is a big deal — and it comes with important financial considerations, one of which is capital gains.

Simply put, capital gains are the profits you make when you sell something for more than you paid for it. In the context of home selling, it’s the difference between the price you bought your home for and the price you sell it for.

In many cases, when you sell your primary residence, you may qualify for a tax break called the capital gains exclusion. This allows you to exclude up to a certain amount of capital gains from your taxable income when you sell your home. As of 2024, for example, the exclusion is up to $250,000 for single filers and up to $500,000 for married couples filing jointly. For lots of people, this is a great help.

There is a catch: to qualify for the capital gains exclusion, there are a few requirements you must meet. First, you need to meet the ownership and residency requirements. This means you must have owned the home for at least two of the last five years leading up to the sale, and you must have lived in the home as your primary residence for at least two of those years.

Now, let’s talk about what happens if you don’t meet those requirements, or if your capital gains exceed the exclusion limit. In that case, you might be on the hook for capital gains taxes. The amount you owe depends on a variety of factors, including your income, how long you have owned the home, and the amount of your capital gains.

But don’t sweat it too much—capital gains taxes are typically more manageable than other types of taxes. Plus, there are a few strategies you can use to minimize your tax liability, such as deducting selling expenses like realtor compensation and lawyer fees, offsetting capital gains with capital losses from other investments or using a 1031 Exchange (my next article will cover this in detail).

Selling your home can have tax implications, but with knowledge and planning, you can simply navigate the process. Remember to keep track of your basis (i.e., the amount you paid for the home plus any improvements), meet the ownership and residency requirements, and take advantage of any tax breaks available to you. If you recently purchased a home, keep all your receipts from home improvements. This will streamline your process in the future when you decide to sell.

My best advice is to consult a tax professional or financial advisor to help you make smart decisions. After all, when it comes to taxes, it’s better to save than be sorry!

Engle & Volkers is a luxury real estate brand connecting clients around the world with the homes of their dreams.