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IRS home-sale exclusion can reduce capital gains on an $800,000 profit
The IRS generally taxes capital gains as sale price minus tax basis, and only profits above the Section 121 exclusion counts as taxable for eligible primary residences.
Yahoo Finance, via SmartAsset, outlines how capital gains taxes generally work when a homeowner sells a primary residence, including scenarios where profits are large. For a primary residence sale, the IRS allows an exclusion of the first $250,000 of profits for single filers or $500,000 for joint filers, assuming the seller meets the rule’s eligibility conditions.
The outlet also explains how to compute capital gains for real estate: the profit is the sale price received minus the tax basis, which typically includes the amount invested in the home and certain improvements. It notes that property taxes, financing or interest costs, and ordinary necessary maintenance generally do not count in the basis calculation, while upgrades that add value can.
To illustrate, the article uses a hypothetical example of buying a home for $500,000, adding $25,000 in kitchen upgrades, and then selling for $700,000. In that example, the cost basis becomes $525,000, producing $175,000 of capital gains before applying any available home-sale exclusion.
The piece emphasizes that investors and homeowners owe tax on the portion of profits that exceed the Section 121 exclusion, even though a significant part of gains can be sheltered when the sale involves an eligible primary residence.