Ask the Tax Editor: Questions on Selling a Home

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at five questions on the home-sale tax exclusion, calculating tax basis in your home and related topics. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Home-sale exclusion

Question: I am planning to sell my home in the next few months. I have lived in the home for many years. Will my gain be taxed?

Joy Taylor: It depends. Generally, if you have owned and lived in your main home for at least two out of the five years before the sale date, up to $250,000 ($500,000 for joint filers) of your gain when you sell the home is tax-free. Any gain above the $250,000/$500,000 exclusion amounts is taxed at long-term capital gains rates of 0%, 15% or 20%, depending on the amount of your taxable income. Losses from sales of primary homes are not deductible.

2. Calculating tax basis in a home

Question: What expenditures can be added to the cost basis of a home to reduce capital gains when the home is sold?

Joy Taylor: To figure the tax basis in your home, you would start with the original cost (including the mortgage if you financed the purchase), add certain settlement fees and closing costs, and add the cost of any additions and improvements that add to the value of your home, prolong its useful life or adapt it to new uses.

IRS Publication 523 has some examples of improvements that increase your tax basis in the home and those that don’t. Examples of big-ticket items that increase basis include adding a room, installing new air-conditioning, renovating a kitchen, finishing a basement, or putting in new landscaping or a pool. Smaller-ticket capital improvements can also increase basis. These include new doors and windows, duct and furnace work, built-in appliances and water heaters. Repairs, maintenance and improvements that are necessary to keep your residence in good condition but don’t add value or prolong its life generally don’t hike the basis.

Note that if you used a room or other space in your home exclusively or regularly for business, or if you rented out your home in the past, you must reduce the tax basis in your home by any depreciation deductions you were eligible for.

Homeowners who keep good records will find it easier to calculate the tax basis. It’s best to keep all your home improvement receipts and invoices in one folder. If you didn’t keep these records, you can try to estimate the costs by looking at old bank or credit card statements, or call the company that originally did the remodeling or put in the upgrade.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

3. Selling a duplex

Question: My wife and I own a duplex. We live in the upstairs unit, and a tenant lives in the downstairs unit. The upstairs and downstairs units each have separate addresses. We are now considering selling the full duplex. Can we take the full $500,000 home-sale exclusion when we sell?

Joy Taylor: No. The up-to-$500,000 gain exclusion applies only to the portion of your duplex that you used for residential purposes (not rental or business purposes). Below is relevant language from IRS Publication 523, 'Selling Your Home':

"You generally can’t exclude gain on the separate portion of your property used for business or to produce rental income... Examples are: (1) a working farm on which your house was located, (2) a duplex in which you lived in one unit and rented the other, or (3) a store building with an upstairs apartment in which you lived."

"[A]n allocation of the gain is required. For this purpose, you must allocate the basis of the property and the amount realized between the residential and nonresidential portions of the property using the same method of allocation that you used to determine depreciation adjustments. Report the sale of the business or rental part on [IRS] Form 4797."

4. Inheriting a home

Question: My mom passed away a couple of years ago, and I inherited her home, which I have been using as a vacation home. I am now ready to sell that house. Will I be taxed on the sale?

Joy Taylor: When you inherited the home from your mom, your tax basis in the property was stepped up to the fair market value at her death. So when you sell, your gain will be equal to the difference between the sales price and your tax basis in the home. Your tax basis would start with the fair market value of the home upon your mom's death. You would add to this figure certain closing costs plus the cost of any improvements you made to the home after your mom's death that add value, prolong its life or adapt it to a different use.

If you have gained from the sale, then your gain would be treated as long-term capital gain, subject to the favorable 0%, 15% or 20% tax rates on long-term gains. If you have a loss from the sale, you cannot deduct it.

5. Tax basis in a home when one spouse dies

Question: My husband and I bought our Minnesota home in 1990 for $240,000. We moved out of state in 2010 and became Florida residents. My husband died in November 2025. I am now selling my Minnesota home for $610,000. What will be my taxable gain?

Joy Taylor: Since your Minnesota home isn't your primary residence and hasn't been for many years, you cannot claim the home-sale exclusion. But when your husband died, provided you and your husband owned the home jointly, you got a step up in tax basis in the home. Your basis after his death would equal to (1) half your original basis ($120,000) plus (2) half of any improvements made to the home that can be added to basis plus (3) half the fair market value of the home upon his death. Your taxable gain would be equal to the sales price of $610,000 less the amount from the preceding sentence. I am assuming for this answer that you kept the Minnesota home as a second residence and didn't rent it out or otherwise use it for business.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor roundups. So keep those questions coming!

Disclaimer

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.