Capital Gains Tax on Real Estate in the United States

For most people, buying a home is the single largest financial commitment they’ll ever make – and often, one of the most stressful.

Yet, for many US citizens, home ownership remains a cornerstone of the American Dream.

Whether it’s about financial security, independence or building generational wealth, millions strive to get on the first rung of the property ladder, even as prices climb and paperwork multiplies.

But here’s the catch: when you eventually sell that home – or any property you’ve invested in – capital gains tax (CGT) can make a sizeable dent in your profit margin.

And because it only applies when you sell, many property owners underestimate or overlook CGT entirely until it’s too late.

In many cases, CGT ends up being the largest one-off tax bill a property owner will ever face. That can be a frustrating experience and one that could have been significantly reduced or even avoided with the right planning.

It doesn’t have to be that way. You don’t have to wait until you’re ready to sell to put together a plan.

By understanding the rules and making smart moves in advance, you can take control of your tax liability long before the taxman comes knocking.

The Nomad Capitalist team has put together a guide to unpacking the key rules around capital gains tax on real estate in the US so you can learn how to protect more of your profile when it’s time to sell.

Sounds interesting? Set up a call with us today to discover how we can help you.

What is Capital Gains Tax on Real Estate? 

Capital Gains Tax (CGT) is a tax paid on any profits made when you sell an asset. 

Real estate is a taxable asset on which any profit must be reported and any capital gains tax owed paid.

However, you often pay no or significantly less tax on a real estate sale if it’s your family home.

In the United States, capital gains tax exists at the federal level, and it’s also charged by most US states. 

So, there’s a good chance you’ll be taxed twice on US real estate sales. 

The amount you pay depends on whether or not you’ve held your capital asset for at least 12 months. This defines whether it’s a short-term or a long-term gain.

In the United States, there’s also Net Investment Income Tax (NIIT), which is a separate charge on capital gains that can further increase what you owe, especially if you’re a high earner.   

You are tasked with calculating the bill yourself and reporting it in your next tax return.

If you make a large profit, you may have to estimate your tax payments throughout the year instead of waiting for your annual filing deadline.

When Do You Pay Capital Gains Tax?  

When you sell US-based real estate at a profit, this must be reported to the Internal Revenue Service (IRS) on your tax return. 

This is true whether you’re a resident or non-resident in the United States. If you’ve held an asset for less than a year, the profit is classified as a short-term gain and classed as regular income for tax purposes.   

If it’s a long-term gain (held for at least one year), you only pay tax on profits if your total taxable income is over a certain threshold.

In 2025, that threshold is US$48,350 for single filers or US$96,700 for married couples filing jointly.

When selling your primary residence, you’ll be granted a capital gains tax exemption, which applies on the first US$250,000 of a gain for single filers or US$500,000 for married couples.

Capital gains tax is charged at the same rates on investment properties as on a primary residence. The key difference is there’s no capital gains exemption on sales of properties that aren’t your primary residence.  

If you haven’t lived in a property for at least two of the previous five years, it doesn’t qualify as a primary residence. 

If you’re a US citizen, you qualify as a US tax resident regardless of whether you live in the United States. This means you’ll have to report and potentially be taxed on your worldwide income and gains.

In other words, when you sell an overseas property, you could still owe capital gains tax in the US.

Capital gains tax may also be due in the country of the property, in which case you will need to investigate any double taxation treaties to know whether you can deduct some of the foreign capital gain. 

You’ll still pay capital gains tax on real estate that’s inherited, rather than purchased. The difference is the cost basis is adjusted to the property’s fair market value at the date of the original owner’s death.

This ensures you don’t pay any CGT on gains while you weren’t the owner, although these gains will likely be hit by estate tax and inheritance tax instead.

How Much is Capital Gains Tax on US Real Estate?

To understand how much capital gains tax you’ll pay on real estate, you first need to understand the different taxes and how they’re calculated.

Federal Capital Gains Tax

If you’ve owned the property for less than a year, the profit is classed as a short-term gain and will be taxed as regular income based on federal income tax rates. 

This additional income might be enough to move you into a higher tax bracket. The highest income tax rate in the United States is 37%.

If you’ve owned the property for over a year, the gain will be taxed according to your total taxable income at the following rates. 

Single filers:

• 0% on US$0 to US$48,350
• 15% on US$48,351 to US$533,400
• 20% on anything over US$533,401.

Married filing jointly:

• 0% on US$0 to US$96,700
• 15% on US$96,701 to US$600,050
• 20% on anything over US$600,051.

These tax brackets are based on all taxable income for the tax year including your gains. 

So, if you have a US$500,000 salary and sell rental and investment properties with a gain of US$120,000, your total taxable income for the year is US$620,000, and you’ll pay 20% on that entire gain at a federal level.

With that said, this calculation ignores the available strategies to reduce your CGT bill, which we’ll discuss shortly.

State Capital Gains Tax

Each US state sets its own tax rates and regulations, with only a handful having no CGT.  

If you’re a resident of one of the 42 that does, or if the asset is based there, you could be taxed at the federal level and the state level.

Thankfully, there are rules in place to prevent you being taxed in two states.

Let’s say you’re a California resident selling a property based in Iowa. You might have to file tax returns in both states, but a tax credit will be due to stop you from being taxed twice.

Most states charge capital gains as ordinary income, although some have a separate capital gains rate.

Net Investment Income Tax (NIIT)

This is a tax on higher earners in the United States. 

You’ll owe NIIT if your annual Modified Adjusted Gross Income (MAGI) is above the threshold of US$200,000 for single filers or US$250,000 for married couples filing together. 

The NIIT rate is 3.8%, which you pay on the lower of the following:

• Your total net investment income for the tax year
• The amount by which your annual MAGI exceeds the NIIT threshold.

Net investment income includes short-term and long-term capital gains, dividends, rental income and royalty income, among other things.

So, if you sold real estate at a US$200,001 net profit, you could not only owe capital gains tax at the federal and state level, but also NIIT.

Calculating Capital Gains Tax on Real Estate

To calculate a capital gain, you subtract an asset’s cost basis from its sale price. 

The amount of tax you’ll pay on the gain depends on your total taxable income for the tax year.

Capital Gains Tax Calculator

Let’s imagine you have a salary of US$500,000 and bought your primary residence in California for US$700,000 and then sold it for US$1 million. That’s a US$300,000 gain. 

However, since it’s your primary residence, you pay no tax on the first US$250,000 of this gain, only the remaining US$50,000.

This takes your total taxable income for the year to US$550,000.

To break this down: 

• Federal capital gains tax: Your total taxable income puts you in the 20% tax bracket for capital gains. US$50,000 x 20% = US$10,000.
• State capital gains tax: California, for example, charges capital gains as regular income. Based on your salary and California’s income tax brackets, you will pay 11.3% tax on that US$50,000 worth of taxable gain. US$50,000 x 11.3% = US$5,650.
• Net investment income tax: Your net investment income is US$50,000 (because the primary residence exemption applies to this tax as well). Your total taxable MAGI is US$550,000 which is US$350,000 over the threshold for single filers. Since your net investment income is the lower figure, you pay 3.8% NIIT on that. US$50,000 x 3.8% = US$1,900.

So, the total tax on your gain is 35.1% of US$50,000, which is US$17,550.

If the property wasn’t your primary residence, you’d lose the capital gains tax exemption and pay more than six times that amount.

This calculation assumes that no other capital gains or losses were made in that tax year.

How to Avoid Capital Gains Tax on Real Estate

If we’ve inspired you to learn more about reducing or eliminating capital gains tax, you’re in luck.

Some of the most effective tips for reducing capital gains tax on US real estate are listed below.

Keep Your Assets for Over a Year

If you’ve owned real estate for less than a year, it’s classified as short-term capital gains and taxed as regular income. This means you might pay as much as 37% on your gain as a high earner.

If you hold an asset for over a year, it’s classified as a long-term gain and the highest rate you’ll pay is 20%.

Time Your Sale Strategically

Whether you’ve made a short-term gain or a long-term gain, the rate you pay depends on your overall income for the tax year.

As such, it’s possible to reduce your tax bill by selling your property in a year where you’ve generated less income. 

Timing your sale strategically may also involve deciding to sell an asset while its price is lower.

Remember, the tax rate you’re designated is paid on the entire gain, so it can be cost-effective to sell an asset before you move into a higher tax bracket. 

Live in Your Property Before You Sell It 

Living in a property before selling it can offer major tax advantages. To qualify for the primary residence exemption, you must have lived there for at least two of the past five years – any 730 days, not necessarily in a row.

You can only use a primary residence exemption once every two years.

Offset Your Capital Losses

The IRS allows you to offset your capital losses against your gains to reduce your overall capital gains tax liability.

These losses can be carried over to future tax years if necessary.  

Short-term losses can only offset short-term gains, while long-term losses must offset long-term gains.

You can also use capital losses to offset your income tax liability, although only by a maximum of US$3,000 per year.

Claim Tax Deductions on Home Improvements

You can claim tax deductions on certain capital improvements, energy-efficient improvements or medically necessary improvements to a home.

These can all reduce your capital gains tax bill once the home is sold. 

Use a 1031 Exchange

You can use a 1031 exchange when you sell one investment property and buy another. This will defer your capital gains tax liability for the previous home until you sell the new one.

This can potentially reduce your overall capital gains tax bill if used strategically, although you’ll often end up with a larger bill later on.

You must identify the new property within 45 days of the sale and buy it within 180 days. Further details are outlined in Section 1031 of the Internal Revenue Code.

Renounce Your US Citizenship

While citizens of most countries can reduce their capital gains tax by moving and getting residency in a tax-friendly country, that’s not enough for Americans. 

Due to its citizen-based taxation model, the only way for Americans to escape their federal tax liability is to renounce their US citizenship. This is an irreversible decision with long-term consequences, so you should think carefully.  

If you do renounce, you may still have to pay exit tax on your unrealised gains, but the IRS will leave all future gains on overseas assets alone.

If you don’t want to give up US citizenship, consider moving to Puerto Rico, where capital gains tax can be as low as 0%. 

However, this requires a much bigger commitment than simply catching a flight to the island before selling your property.

Failing that, you can reduce your capital gains tax at the state level by moving out of that state and cutting all ties that make you a resident there.

Capital Gains Taxes on Real Estate: FAQs

Reducing Capital Gains Tax on Real Estate Sales

A hefty capital gains tax bill can leave a bitter taste even for the wealthiest investor, and who’s to say it won’t get worse if the taxman gets his way. That’s why it’s worth taking steps to reduce your capital gains tax liability now.

There’s only so much you can do if you start making plans when you’re ready to sell the property. 

This guide should serve as a useful resource, but it certainly pays to work with an accountant or a tax advisor who can detail the best steps available for your assets.

Getting out from under the US tax system by renouncing your citizenship will help to eliminate your capital gains tax liability. 

Nomad Capitalist has helped thousands of investors and entrepreneurs legally reduce their taxes  by making the most of their offshore options. 

Our clients are paired with experts in tax, investment strategy, asset protection and immigration to make a holistic plan based on their unique situation. To learn how we can help you, get in touch today.