In Episode 79 of The Reality of Real Estate, we tackle a topic that affects nearly every homeowner at some point: capital gains tax. With ongoing discussions around potential tax reform, understanding how capital gains works—and how it could change—is critical for anyone thinking about selling their home.

Before diving in, it’s important to note that this is not tax or legal advice. For guidance specific to your situation, always consult a licensed CPA or attorney.

What Is Capital Gains Tax?

Capital gains tax is the tax you may owe on the profit made from selling an asset, including real estate. In simple terms, it’s the difference between what you paid for your home and what you sell it for, minus certain allowable expenses.

For homeowners, the IRS currently allows an exclusion on gains from the sale of a primary residence if specific criteria are met. However, these thresholds have not changed since 1997, even as home values have increased significantly.

Current Capital Gains Exemptions

Under existing tax law, homeowners may exclude:

• Up to $250,000 in gains for single filers
• Up to $500,000 in gains for married couples filing jointly

To qualify, you must have lived in the home as your primary residence for at least two of the past five years.

While these limits once covered most home sales, today’s rising home values mean more homeowners are exceeding these thresholds—especially in long-term ownership situations.

Why Reform Is Being Discussed

A proposed bill introduced by Rep. Craig Goldman of Texas aims to eliminate federal capital gains taxes on primary residences for qualifying homeowners. The argument behind this proposal is that outdated tax caps discourage people from selling, which in turn reduces available housing inventory.

As of March 2026, this proposal has not yet passed, but it has sparked significant conversation across the real estate and financial industries.

Real-Life Example: Why This Matters

Consider a homeowner who purchased a property 25 years ago for $200,000 and is now selling it for $500,000. That creates a $300,000 gain. After accounting for improvements, commissions, and closing costs, the net gain may fall within the $250,000 exemption for a single filer—meaning no capital gains tax is owed.

However, if that same property had been purchased decades earlier for a much lower price, the gain could exceed the exemption threshold. In those cases, the homeowner may be responsible for paying taxes on the excess amount, often at rates around 15–20% depending on income, and potentially higher in certain situations.

Special Situations to Consider

Capital gains tax becomes more complex in certain scenarios, including inherited properties, trusts, and investment strategies.

One important concept is the step-up in basis, which adjusts the property’s value to its market value at the time of inheritance. This can significantly reduce or even eliminate capital gains tax for heirs, particularly surviving spouses.

However, not all situations qualify for favorable treatment. For example, individuals involved in expatriation or certain types of investment transactions, such as improperly structured exchanges, may still be subject to capital gains taxes regardless of other exemptions.

How This Impacts Today’s Housing Market

Capital gains tax policy plays a larger role in the housing market than many people realize. When homeowners feel “locked in” due to potential tax liability, they are less likely to sell. This reduces housing inventory and can contribute to rising home prices.

In markets like Charlottesville and across Central Virginia, where property values have appreciated significantly, this issue is becoming increasingly relevant for long-term homeowners.

What Home Sellers Should Do Now

If you’re considering selling your home, it’s important to understand your potential tax exposure early in the process. Reviewing your purchase price, documenting improvements, and consulting with a tax professional can help you make informed decisions.

Even if you’re not planning to sell immediately, staying informed about potential tax reforms can help you better time your move and maximize your financial outcome.

Key Takeaways from Episode 79

Capital gains tax remains one of the most important—and often misunderstood—factors in real estate. While proposed reforms could significantly change how homeowners are taxed, current laws still rely on outdated thresholds that may impact more sellers than ever before.

Understanding how these rules apply to your situation is essential for making smart real estate decisions, whether you’re selling now or planning for the future.

Learn More

For detailed IRS guidance, review Publication 523:
https://www.irs.gov/publications/p523

Sources

IRS Publication 523 – Selling Your Home
Kiplinger – Capital Gains Tax Insights
Realtor.com – Housing Trends and Capital Gains Discussions