Selling your home in retirement: what you'll owe

If you've owned your home for a long time, it may have grown in value far more than you ever expected. That's wonderful news, and it naturally leads to a question: if I sell, how much of that goes to taxes?

For most people selling the home they live in, the answer is reassuring. The tax law is generous here. But there are limits, and a few details can make a real difference, especially for married couples. Let's walk through it.

The home-sale tax break

When you sell your main home, you can keep up to $250,000 of profit free of federal income tax if you're single, or up to $500,000 if you're married and file your taxes together. Tax professionals sometimes call this the Section 121 exclusion, after the part of the tax code it comes from.

To qualify, you generally need to have:

• owned the home for at least two of the five years before you sell,
• lived in it as your main home for at least two of those five years (the two years don't have to be in a row), and
• not used this break on another home sale in the past two years.

For married couples to get the full $500,000, at least one of you needs to have owned the home for two years, and both of you need to have lived there for two years.

And you can use this break more than once in your life, as long as you meet the rules each time.

Your profit isn't the same as your sale price

This is the part that trips people up. The tax break applies to your profit, which the IRS calls your gain. It's not the price you sell for, and it's not the same as your equity (what you'd have left after paying off the mortgage).

Here's the basic math:

Your profit = the sale price − your selling costs − your basis

Your selling costs are things like the real estate agent's commission, title fees and transfer taxes.

Your basis is, roughly, what you've invested in the home. It starts with what you paid for it, plus some of the costs of buying it. Then it goes up when you make major improvements, the kind that add value or extend the home's life: an addition, a new roof, new windows, a remodeled kitchen. Everyday repairs and maintenance, like fixing a leak or repainting, don't count. (If you ever rented out the home or claimed a home office, that can lower your basis. A tax preparer can sort that out.)

Let's look at an example. Years ago you bought your home for $200,000, and over time you put $50,000 into improvements. Today you sell it for $900,000 and pay $50,000 in selling costs.

Your profit is $900,000 − $50,000 − $250,000 = $600,000. As a married couple, the first $500,000 is tax-free. You'd owe tax only on the remaining $100,000.

How much tax? Profit on something you've owned for more than a year is taxed at special long-term capital gains rates, which are lower than regular income tax rates: 0%, 15% or 20%, depending on your total income. In 2026, a married couple pays 0% on gains while their taxable income stays below about $98,900, 15% up to $613,700, and 20% above that. Depending on your other income, some or all of the $100,000 would be taxed at 15%, so up to about $15,000, plus any state tax.

People with higher incomes, above $250,000 for a married couple, may also owe an extra 3.8% on the taxable part. It's called the net investment income tax. Most states tax the profit as regular income.

For married couples: how you own the home matters

This next part sounds technical, but it can be worth a lot of money, so it's worth a few minutes.

When someone dies, the property they leave behind usually gets a fresh starting value for tax purposes: its market value on the day they died. This is called a step-up in basis. In plain terms, all the growth in value during their lifetime is wiped clean for tax purposes. If the home is later sold for about that value, there's little or no profit to tax.

How much of your home gets that fresh start depends on how it's owned:

• If the home is in the name of the spouse who dies, the whole home gets the fresh starting value.
• If you own it jointly, in most states only the half that belonged to the spouse who died gets it. The survivor's half keeps its old value.
• In community-property states, such as California, Texas and Arizona, the whole home often gets the fresh starting value when the first spouse dies.

There's one more helpful rule. A surviving spouse can generally still use the full $500,000 break if they sell within two years after their spouse's death and haven't remarried.

Put those together, and timing can matter a great deal. For some couples, a sale by the surviving spouse would owe far less tax than a sale today. No one can, or should, plan their life around a death, and if selling makes sense for you now, that comes first. But it's a good question to raise with a tax adviser before you decide.

A few other things that can change the picture

• If you rented out the home before living in it. Years it was a rental after 2008 can make part of your profit taxable, and any depreciation you took is always taxed. There's more on this in our guide to rentals and second homes.
• Medicare premiums. A large taxable profit can raise your Medicare premiums. Medicare looks at your income from two years earlier, so a big sale in one year can mean higher premiums two years later.
• If you have to move early. If health, a new job or certain unexpected events force you to sell before you've lived there two years, you may still qualify for part of the break.

Before you sell

Pull together your original purchase papers and any receipts for major improvements, even old ones. Then ask a tax preparer to estimate your profit and the tax before you sign a sales contract. If you'd like to read the official rules, IRS Publication 523, Selling Your Home, has them, along with worksheets.