The Capital Gains Tax Strategy Retirees Can Use To Cut Taxes by $10K on Home Sales
Are you a retiree selling a home you've owned for decades? Congratulations on the windfall, but let's talk about the tax bill that's about to arrive. Capital gains taxes on a home sale can quickly turn a feel-good moment into a financial headache. If you're sitting on six figures of profit, the IRS is ready to take its cut. The question isn't whether you'll owe taxes; it's how much you can dodge legally.
Here's the reality: retirees have surprisingly powerful tools at their disposal to slash their capital gains tax bill. We're talking $10,000+ in savings for the right moves, and that's after you've already pocketed a solid gain on the sale. The trick is knowing which strategies apply to your situation and stacking them for maximum impact. Whether you've got a small gain or a monster profit, at least one of these tactics is built for you.
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Claim the Primary Residence Exclusion
According to Logan Allec, certified public accountant (CPA) and owner of Choice Tax Relief, one of the most valuable tax strategies retirees can use is the home sale gain exclusion under Section 121 of the tax code.
Allec shared that per IRS rules, “those who qualify under this exclusion rule can exclude up to $250,000 of their gain on the sale of their primary residence if they're single, or up to $500,000 if they're married filing jointly.”
But how do you qualify? To be eligible, the home needs to have been your primary residence for 24 months of the previous five years. You also can't use this exclusion more than once every two years.
Luckily, Allec added, most states honor this exclusion too, so you're potentially dodging both federal and state taxes.
Track Your Home Improvements to Increase Your Cost Basis
If the exclusion doesn’t cover your entire gain or you don’t qualify for Section 121, Allec recommended adding the cost of eligible home improvements you’ve made while you’ve owned your property to your cost basis. These may include roof replacements, home additions, basement conversions and other major construction projects or upgrades.
However, the improvements must add value to your property, and “routine repairs don’t count,” said Allec. For example, swapping out a light fixture or cabinet hardware would not qualify because those are aesthetic updates, and “fixing a leaky faucet would be considered a repair rather than an improvement,” Allec explained.
An improvement must “add value to the home, prolong its life or adapt the home or a space to a new use,” said Allec.
Take Advantage of the 0% Long-Term Capital Gains Rate
Another strategy retirees can use to shave thousands off their taxes is the 0% long-term capital gains rate. If your profit exceeds the $250,000 or $500,000 home sale exclusion, the remaining gain may be taxed as a long-term capital gain, explained Allec.
How it works: Retirees with lower taxable income and deductions may qualify for the 0% federal capital gains tax rate. Allec provided the following scenario.
Say a married couple sells their home for $1 million. They subtract $100,000 in transaction costs and closing expenses, plus their $300,000 cost basis. Their gain: $600,000. The $500,000 primary residence exclusion brings that down to $100,000 in taxable gain. Apply their $32,200 standard deduction, and their taxable income drops to $67,800.
Because that amount is below the 2026 threshold for the 0% long-term capital gains rate, he said they would owe no federal capital gains tax on the sale.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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