Capital gains tax is the tax owed on the profit when you sell an asset such as a home for more than you paid for it. For real estate, the gain is roughly the sale price minus your cost basis and selling expenses. Rates depend on how long you owned the property and, for non-residents, on special US rules.
How does capital gains tax work on a home sale?
Your capital gain is not simply the sale price. It is the amount left after you subtract your cost basis and the expenses of selling. Cost basis usually starts with what you paid for the home, plus qualifying improvements and certain acquisition costs, which raises your basis and lowers your taxable gain.
The rough calculation
In simplified terms, the gain looks like this:
- Start with the sale price
- Subtract selling costs such as agent commission and parts of your closing costs
- Subtract your adjusted cost basis (purchase price plus capital improvements)
- The remainder is your capital gain, which is what may be taxed
How that gain is taxed depends on the holding period. Assets held longer than a year generally qualify for lower long-term capital gains rates, while property held a year or less is typically taxed at higher short-term rates that track ordinary income. If you claimed depreciation on a rental, a portion of the gain may also face depreciation recapture, which is taxed differently.
Many owners who lived in the home may qualify for a primary-residence exclusion that shields a portion of the gain if ownership and use tests are met. Investment and second homes generally do not qualify, though a 1031 exchange can defer the tax when one investment property is swapped for another.
Primary residence vs. investment property
The tax treatment changes sharply depending on how the property was used. A home you lived in as your main residence may be eligible for an exclusion that removes a large share of the gain from tax, provided you meet the ownership and use requirements. An investment or rental property does not get that exclusion, and its gain is fully in play, adjusted for depreciation.
Pros | Cons |
|---|---|
A qualifying primary residence can exclude a substantial portion of the gain | Investment properties get no primary-residence exclusion |
Long-term holdings are taxed at lower rates than short-term flips | Depreciation taken on a rental is subject to recapture at sale |
Improvements and selling costs raise your basis and shrink the taxable gain | Short-term gains are taxed like ordinary income, which is usually higher |
State rules add another layer. Some states tax capital gains as ordinary income, others have no state income tax at all, so where the property sits affects your total bill. Always confirm the current federal and state treatment for your specific situation.
Why it matters for non-resident and diaspora sellers
If you own US property but live abroad, capital gains tax deserves extra attention. Under US rules, buyers of property from foreign sellers are generally required to withhold a percentage of the gross sale price at closing and remit it to the IRS. This withholding is not the final tax; it is an advance against what you may owe, and you typically reconcile it by filing a US return, sometimes recovering part of it as a refund.
Because the withholding is on the gross price rather than the profit, it can tie up a meaningful chunk of your proceeds until you file. Planning ahead, keeping records of your basis and improvements, and understanding any tax treaty between the US and your country of residence can all affect the outcome.
Once the tax picture is settled, the net proceeds still need to reach you across borders. Dara is built for that transfer, moving diaspora sale proceeds home efficiently. Coordinate your gain estimate with your property tax obligations and closing figures so nothing on your settlement statement is a surprise. This is general information, not tax advice, so confirm specifics with a qualified cross-border tax professional.
Frequently asked questions
Broadly, you take the sale price, subtract selling costs and your adjusted cost basis (purchase price plus improvements), and the remainder is your gain. That gain is then taxed at short-term or long-term rates depending on how long you owned the home.
Property held longer than one year generally qualifies for lower long-term capital gains rates. Property held a year or less is taxed at short-term rates, which typically match your ordinary income tax bracket and are higher.
Yes. Non-resident owners are generally subject to US tax on gains from US real estate, and buyers are typically required to withhold a percentage of the gross sale price at closing. That withholding is an advance you reconcile by filing a US return.
Owners of a qualifying primary residence may exclude part of the gain if they meet ownership and use tests. Investors can often defer tax on an investment property through a 1031 exchange. Rules are strict, so confirm eligibility with a tax professional.
Yes. Qualifying capital improvements add to your cost basis, which lowers the taxable gain when you sell. Keep receipts and records, since routine repairs generally do not count while structural improvements usually do.
Updated July 21, 2026
Disclaimer
Dara provides this glossary for general educational purposes only. It is not financial, legal, or tax advice, and availability, fees, and terms vary by country and corridor.
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