Tax Basics for Home Sellers: Capital Gains Exclusion Explained Simply
By Carl Chapman, Realtor
March 23, 2026
Selling a home in Arizona? Wondering about taxes on your profit? The good news is the IRS offers a generous capital gains exclusion for the sale of your primary residence. This guide simplifies the process for Arizona sellers.
What’s the Capital Gains Exclusion?
If you meet the IRS rules, you might be able to exclude up to $250,000 of profit from taxes (or $500,000 for married couples filing jointly).
Understanding the IRS Rules (2-out-of-5 Test)
To qualify:
- Ownership: You must have owned the home for at least 2 years.
- Use: You lived in it as your main home for at least 2 years within the last 5.
These two years don’t have to be consecutive.
Calculating Your Gain
Taxes are based on your gain, not just the sale price:
Gain = (Sale price – selling costs) – (Purchase price + qualifying improvements + buying costs)
The IRS provides detailed guidance in Publication 523.
A Simple Example
Purchase price: $400,000
Qualifying improvements: $60,000
Sale price: $650,000
Selling costs: $40,000
Amount realized: $650,000 – $40,000 = $610,000
Adjusted basis: $400,000 + $60,000 = $460,000
Estimated gain: $610,000 – $460,000 = $150,000
If you qualify, this $150,000 gain may be fully excluded from tax.
Qualifying Improvements vs. Repairs
Qualifying improvements increase your basis (e.g., roof replacement, HVAC, room additions, kitchen remodels).
Repairs generally do not increase your basis (e.g., painting, fixing a leak, replacing a window pane).
Tip: Start a "basis folder" early to keep track of improvements and repairs.
The "Once Every Two Years" Rule
Even if you meet the ownership and use tests, the exclusion is generally limited to once every two years. Don’t forget this rule!