Capital Gains Tax on Real Estate and Home Sales

When selling your home or a rental property at a gain, there are important capital gains tax rules to keep in mind.

rendering of white home cutout on a stack of money against blue background
(Image credit: Getty Images)

Knowing the rules for capital gains tax on residential real estate and home sales is important, especially since your property has likely increased in value since you purchased it. Eventually, when you dispose of the property, either voluntarily or involuntarily, you'll need to determine the federal income tax consequences of that built-in appreciation. 

Perhaps you want to sell your main home, vacation home, or residential rental property that you own. Or you might, unfortunately, be experiencing financial trouble and are considering negotiating a short sale of your home with the bank. Other people may have had their homes destroyed in a wildfire, hurricane, or other natural disaster. You certainly don’t want to be hit with a larger-than-necessary tax bill. 

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How long you hold your QOF InvestmentWhat happens to your basis
If you hold your QOF investment for at least 5 yearsYour basis in it increases by 10% of the originally deferred gain, meaning that 10% of the deferred gain can go permanently untaxed.
If you hold your QOF investment for at least 7 years,Your tax basis in it is further increased by 5% of the gain that was originally deferred.
If you hold your QOF investment for 10 years or more You can then elect to increase your basis to fair market value at the time you sell the investment, so that post-acquisition appreciation in the QOF isn’t taxed when the interest is sold.

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Joy Taylor
Editor, The Kiplinger Tax Letter

Joy is an experienced CPA and tax attorney with an L.L.M. in Taxation from New York University School of Law. After many years working for big law and accounting firms, Joy saw the light and now puts her education, legal experience and in-depth knowledge of federal tax law to use writing for Kiplinger. She writes and edits The Kiplinger Tax Letter and contributes federal tax and retirement stories to and Kiplinger’s Retirement Report. Her articles have been picked up by the Washington Post and other media outlets. Joy has also appeared as a tax expert in newspapers, on television and on radio discussing federal tax developments.