Thinking About Selling Your Home? Read This First 

One of the most common conversations I have with clients revolves around selling their home.   

The kids are grown and on their own scattered across the country in cities you never expected. The big house that made perfect sense 25 years ago, with its four bedrooms, finished basement, and sprawling yard, now feels like more responsibility than reward. Or, the summer home that once filled up every weekend now sits empty more than it’s used. 

The thought creeps in: Maybe it’s time to simplify. 

And then, almost immediately, the second thought follows: But what about the capital gains taxes? 

It’s a legitimate concern, and one that stops a lot of people from making decisions that could potentially improve their quality of life. The good news is that once you understand how capital gains taxes actually work on a home sale, the picture is often far less daunting than you feared. 

The important thing to know upfront is this: the tax rules for selling your primary home and your vacation home are very different. Understanding that distinction may reduce taxes significantly, or help you make a more informed decision about which home to sell, and when. 

Let’s walk through both fictitious scenarios. 

Selling Your Primary Home: Rick and Lucy’s Story 

Rick and Lucy are 62 years old. They purchased their home back in 1990 for $250,000, a stretch at the time, but worth every penny in a wonderful family neighborhood west of Boston. Over the years, they added a large addition, finished 1,500 square feet of basement, and put in a pool — a combined $250,000 in permanent improvements. 

Today, a local realtor told them their home is worth $1,650,000. 

After paying their realtor and closing costs, they expect to walk away with approximately $1,550,000 since they have no mortgage remaining. The question on their minds: How much of that is going to the IRS? 

To answer that, you need to understand one key term: cost basis. 

Your cost basis is your total investment in the property for tax purposes. For Rick and Lucy, it looks like this:

Component	Amount
Original purchase price	$250,000
Permanent improvements	$250,000
Adjusted cost basis	$500,000

From their $1,550,000 net proceeds, they first subtract their $500,000 cost basis, leaving $1,050,000 potentially subject to capital gains taxes. 

But here’s where the tax law is generous for primary home sellers: The IRS allows married couples who own their home jointly to exclude an additional $500,000 from capital gains taxes on the sale of their primary residence ($250,000 for single filers). This is known as the primary home sale exclusion. 

After subtracting both the cost basis and the exclusion, here’s what Rick and Lucy’s taxable gain looks like: 

	Amount
Net proceeds from sale	$1,550,000
Less: adjusted cost basis	($500,000)
Less: married couple exclusion	($500,000)
Taxable capital gain	$550,000

At the 20% federal long-term capital gains rate, which applies at higher income levels, that’s approximately $110,000 in federal capital gains taxes.  They may also owe the 3.8% net investment income tax depending on their modified adjusted gross income. Assuming they do, that would add $20,900, and the total federal tax bill rises to $130,900.  If they live in a state with a state income tax like Massachusetts, add another 5% for state taxes bringing the total tax bill to $158,400.   

What If They Keep It and Leave It to the Kids? 

This is where the planning gets really interesting, and where the decision becomes more nuanced than simply “sell now or sell later.” 

If Rick and Lucy keep their home and pass it to their children at death, something powerful happens: the cost basis “steps up” to the fair market value on the date of death. This is one of the valuable and often misunderstood provisions in the tax code. 

If their home is worth $1,650,000 at their deaths, and their children sell it shortly thereafter for that same amount, the children owe zero in capital gains taxes. The lifetime of appreciation can be eliminated from a tax standpoint in this example. 

That’s potentially a $130,900 to $158,400 difference — plus any additional appreciation between now and their passing. 

The lesson: if Rick and Lucy don’t need the proceeds from their home to fund their retirement lifestyle, and if passing wealth to their children is a priority, keeping the home and allowing the step-up in basis to work the way it is intended may be the smarter financial move. On the other hand, if simplifying their lives for their own relaxing retirement is the goal, selling now at a very manageable tax cost is entirely reasonable. 

Successfully navigating these types of decisions is one of the reasons why having a carefully crafted Retirement Blueprint is so important.   

Selling Your Vacation Home: A Very Different Story 

Now let’s talk about your summer home or your snowbird home down South in winters because the tax rules here are fundamentally different, and the surprise can be significant if you’re not prepared. 

When you sell a second home, a property that has not been your primary residence, the $250,000/$500,000 exclusion does not apply. You will pay capital gains tax on all appreciation above your adjusted cost basis. 

Let’s walk through a realistic example. 

You purchased a lake house in Maine 25 years ago for $200,000. Over the years you made $150,000 in permanent improvements: a new kitchen, a dock addition, and a whole-house generator. Your adjusted cost basis is therefore $350,000. 

Today the property is worth $800,000. After paying your realtor (5%) and other closing costs, you walk away with approximately $750,000. 

Here’s the calculation:

	Amount
Net proceeds from sale	$750,000
Less: adjusted cost basis	($350,000)
Taxable capital gain	$400,000

At the 20% federal capital gains rate, plus the 3.8% (assuming the entire gain is subject to net investment income tax), your total federal tax would be approximately $95,200.  If you live in Massachusetts, or another state with a state income tax rate of 5%, your total tax bill comes to over $115,000 leaving you with roughly $635,000 after taxes and closing costs. 

That’s a meaningful number. But there are three important strategies worth knowing before you decide. 

Strategy #1: The Step-Up in Basis 
Just as with a primary home, if you pass away and your children sell your vacation property, the cost basis steps up to the fair market value on the date of death, and capital gains taxes may be minimized or eliminated under current law. If your children are likely to use and enjoy the property, and if estate planning is a priority, this is worth serious consideration. 

Strategy #2: The Two-in-Five Rule 
If you sell your primary home first and move into your vacation property as your primary residence for at least two of the five years preceding its sale, you may then use the $250,000/$500,000 exclusion when you sell it. In our summer or snowbird home example, that strategy could save you the full $115,000 in capital gains taxes, a significant reward for a relatively modest lifestyle adjustment. 

Strategy #3: Depreciation Recapture If You Rented It 
If you ever rented your vacation home and claimed depreciation deductions, those accumulated deductions reduce your cost basis dollar for dollar, increasing your taxable gain when you sell. If, for example, you depreciated $160,000 over 15 years of rental use, your cost basis drops from $350,000 to $190,000, and your taxable gain increases accordingly. Keep careful records of every deduction you have taken. 

The Most Important Lesson in All of This 

Whether you are thinking about selling your primary home, your vacation property, or both, there is one principle that runs through every scenario: know your cost basis. 

Your cost basis is the foundation of every capital gains calculation, and many people may not have any idea what theirs is, or have lost the receipts and records to document it properly. 

Start now. Pull together your original purchase documents, every receipt for permanent home improvements, and records of any depreciation you may have claimed if you rented the property. The difference between a well-documented cost basis and a poorly documented one could potentially be tens of thousands of dollars in taxes. 

When you know your numbers, you can make calm, rational decisions based on fact. You can evaluate whether selling now, selling later, converting a vacation home to a primary residence, or simply holding and letting the step-up in basis work for your family is the right move for your specific situation. 

This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation. 

The examples above are hypothetical and provided for educational purposes only. Actual tax results will vary based on individual circumstances, property history, income, eligibility requirements, and applicable tax rules. Before implementing any tax or estate planning strategy, consult with your tax and financial professionals regarding your specific situation.