Key Takeaways
- Your taxable gain is the sale price minus selling costs, minus your adjusted basis, minus the home sale exclusion. Each cost either lowers what you realize or raises your basis, so the records you keep directly change the tax.
- The Section 121 exclusion covers up to $250,000 of gain for single filers and $500,000 for joint filers if you owned and lived in the home for 24 of the last 60 months. As of October 2026 those limits are unchanged since 1997 and aren’t indexed for inflation.
- Replacing a component of the home (a built-in appliance, water heater, roof, or windows) generally adds to basis. Painting and small repairs on their own usually don’t, unless they’re folded into a larger remodel.
- Seller closing costs, commissions, transfer taxes, and buyer credits come off the sale price. Gain above the exclusion is typically taxed at 0%, 15%, or 20%, plus the 3.8% net investment income tax for higher earners.
- Good documentation is where the real savings sit. In our illustration, a couple who tracked their basis reported $131,000 less taxable gain, roughly $31,000 in federal tax, than one who didn’t.
How Is the Gain on a Home Sale Calculated?
None of the costs below are itemized deductions. Each one either lowers the amount you realize from the sale or raises your basis, which is the tax term for your total investment in the home.
Gain = (Sale price − Selling costs) − (Purchase price + Purchase closing costs + Improvements − Basis reductions)
If the home was your main home, you can generally exclude up to $250,000 of that gain, or $500,000 if married filing jointly. The usual test: you owned and lived in the home for at least 24 months of the 5 years before the sale, and you haven’t claimed the exclusion on another home in the past 2 years. A partial exclusion may still apply if you sell early because of a job move, health reasons, or an unforeseeable event.
Gain above the exclusion is typically taxed at long-term capital gains rates of 0%, 15%, or 20%, and higher earners may also owe the 3.8% net investment income tax on the taxable portion. As of October 2026, the exclusion limits haven’t changed since 1997 and aren’t indexed for inflation.
Which Home-Prep Costs Reduce the Gain?
Getting a home ready for market often runs into the thousands, and the tax result depends on what the work is. Replacing a component of the home generally adds to your basis. Routine repairs and touch-ups on their own do not.
| Prep cost | Reduces gain? | Treatment |
|---|---|---|
| Replacing a built-in appliance (dishwasher, cooktop, wall oven, built-in microwave) | Generally yes | Capital improvement, added to basis |
| Replacing a water heater, furnace, or central air unit | Generally yes | Capital improvement, added to basis |
| New flooring or wall-to-wall carpet | Generally yes | Capital improvement, added to basis |
| Upgrading light fixtures across a room or the home, or rewiring | Generally yes | Improvement, strongest when part of a broader project |
| New landscaping, fencing, or a walkway | Generally yes | Capital improvement, added to basis |
| Painting and small repairs done as part of an extensive remodel | Generally yes | Added to basis with the rest of the project |
| Staging and listing photography | Generally yes | Selling expense |
| Repairs you pay for after the buyer’s inspection | Depends | May qualify as a selling expense; a closing credit is cleaner (see below) |
| Interior or exterior painting on its own | No | Repair; the IRS names painting specifically |
| Swapping one broken light fixture, switch, or outlet | No, in most cases | Repair |
| Fixing leaks, filling holes or cracks, replacing broken hardware | No | Repair |
| Replacing a freestanding refrigerator, washer, or dryer | No | Personal property, not part of the home |
| Cleaning, power washing, yard upkeep | No | Maintenance |
How clients commonly make prep costs count
- Replacing rather than repairing an item near the end of its life. A new built-in appliance or water heater is an improvement. A repair to the old one is not.
- Folding paint and small fixes into a genuine remodel. IRS Publication 523 treats repair-type work as an improvement when it is part of an extensive remodeling or restoration job. Its own example: replacing one broken windowpane is a repair, but replacing that window as part of replacing every window in the home is an improvement. A paint job by itself does not qualify.
- Taking buyer-requested repairs as a closing credit. A credit to the buyer generally reduces the sale price, which lowers your amount realized without any question about whether the work was a repair.
- Asking contractors for itemized invoices. The invoice is usually the best evidence of whether an item was replaced or repaired, and of when the work was done.
About the 90-day rule. Some websites still say painting and repairs done within 90 days of a sale reduce your gain. That rule belonged to the old home-sale rollover and was repealed for sales after May 6, 1997.
What Selling Costs Reduce the Amount Realized?
Costs you pay to sell the home come off the sale price, and agent commissions are usually the largest. IRS Publication 523 lists commissions, advertising, legal fees, and buyer loan charges you cover, plus a catch-all for any other fees or costs to sell your home.
| Selling cost | Notes |
|---|---|
| Real estate commissions | Listing and buyer-agent commissions you pay as the seller |
| Advertising, marketing, and staging | Listing photos, signage, online ads, stager fees |
| Legal fees | Contract review and closing attorney |
| Transfer, stamp, or excise taxes | Not deductible as a tax, but treated as a selling expense when the seller pays them |
| Settlement, escrow, and owner’s title insurance | When billed to the seller |
| Buyer loan charges you pay | Points or loan fees that would normally be the buyer’s |
| Credits and concessions to the buyer | Generally reduce the sale price |
| Other costs to sell | Home warranty for the buyer, pre-listing inspection, HOA transfer fees |
Not selling costs: paying off the mortgage, prorated property taxes and HOA dues, utilities, and moving costs.
What Else Adds to Your Basis?
For long-time owners, what you paid to buy the home and what you’ve improved since usually matter more than prep work. Both are easy to lose track of without records.
- Purchase closing costs. Owner’s title insurance, transfer or stamp taxes you paid as the buyer, recording and survey fees, legal fees for the title search and deed, and utility installation charges generally add to basis. Loan costs such as points, mortgage insurance, and a lender-required appraisal don’t.
- Capital improvements. Work that adds value, extends the home’s life, or adapts it to a new use generally adds to basis: an addition, a new roof or siding, HVAC, a water heater, new windows, flooring, landscaping, fencing, a pool, or a kitchen remodel. Special assessments for local improvements, like sidewalks, count too. An improvement you later replaced, such as an earlier roof, drops out.
- What lowers basis. Depreciation from a home office or rental period reduces basis, and that part of the gain can’t be excluded; it’s typically taxed at up to 25%. Prior casualty loss deductions, insurance reimbursements, and home energy credits you claimed also reduce basis.
A home you inherited, received as a gift, or received in a divorce starts from a different basis entirely, which can change the math significantly and is worth reviewing with a CPA.
How Much Can Documentation Save?
In this illustration, a married couple who documents their costs reports $131,000 less taxable gain than a couple who does not. For a couple already in the top capital gains bracket, that is roughly $31,000 of federal tax at the combined 23.8% rate. They bought in 2012, sold in 2026, and qualify for the full $500,000 exclusion.
| Costs documented | Costs not documented | |
|---|---|---|
| Sale price | $1,200,000 | $1,200,000 |
| Agent commissions | ($60,000) | ($60,000) |
| Other selling costs | ($12,000) | ($12,000) |
| Amount realized | $1,128,000 | $1,128,000 |
| Purchase price | $400,000 | $400,000 |
| Purchase closing costs | $6,000 | — |
| Improvements: kitchen, roof, HVAC, fence and landscaping | $120,000 | — |
| Pre-sale prep: new dishwasher, cooktop, and built-in microwave | $5,000 | — |
| Adjusted basis | $531,000 | $400,000 |
| Gain | $597,000 | $728,000 |
| Exclusion (married filing jointly) | ($500,000) | ($500,000) |
| Taxable gain | $97,000 | $228,000 |
Figures are illustrative. Actual tax depends on your income, filing status, and state, and many states tax capital gains as well.
How Does Georgia Treat the Gain?
Georgia’s income tax starts from federal adjusted gross income, so the federal home sale exclusion generally carries through to a Georgia return. Any taxable portion is then taxed at Georgia’s flat individual income tax rate. If you’re selling a home in one state while living in another, both states’ rules may come into play.
For a deeper look at how your state handles federal provisions like this one, see our Georgia state tax guide, and confirm the current-year conformity before you file.
What Records Should You Keep?
Keep both closing statements, Form 1099-S, and the itemized invoices, proof of payment, and permits for every improvement and pre-sale project. The IRS generally expects basis records to be kept until 3 years after the due date of the return for the year you sell.
How Can Fusion CPA Help?
The best time to look at the gain is before you list, while prep spending and repair credits are still decisions rather than receipts. Fusion CPA models the numbers up front so you can make those calls with your eyes wide open. A typical home-sale engagement covers:
- Rebuilding your adjusted basis from closing statements, invoices, and prior returns
- Sorting planned prep work into improvements, repairs, and selling expenses before the money is spent
- Estimating the gain, the exclusion, and the federal and state tax on any taxable portion
- Preparing and filing the return that reports the sale, including Form 8949 and Schedule D
Fusion CPA provides tax preparation, tax planning, outsourced accounting, and CFO advisory for business owners and high-achieving individuals across all 50 states, and our personal income tax team reports home sales as part of the individual return. To schedule a free discovery call, call 404-955-7338, email info@fusiontaxes.com, or find a Fusion CPA office near you.
Sources
- IRS Publication 523, Selling Your Home (2025 returns, published February 26, 2026)
- Internal Revenue Code Section 121, Exclusion of gain from sale of principal residence
- Internal Revenue Code Section 1(h), long-term capital gains rates and the unrecaptured Section 1250 gain rate
- Internal Revenue Code Section 1411, net investment income tax
- IRS Form 8949 and Schedule D instructions, reporting the sale
About the Author
Trevor McCandless, CPA, MTax, is the founder and CEO of Fusion CPA, which he started in Atlanta in 2011. His work centers on tax strategy for business owners and high-achieving individuals and families. This article was reviewed by Steven Sumners, CPA, MAcc, Senior Tax and Accounting Manager at Fusion CPA.
