Capital Gains Tax on Real Estate: Everything You Need to Know

What Is Capital Gains Tax?

Capital gains tax is the tax you pay on the profit from selling an asset. In the case of real estate, it's the difference between your purchase price (plus expenses) and your selling price.

For example:

You bought a property for $400,000
You sold it for $600,000
Your profit (capital gain) is $200,000
You may owe tax on that $200,000

But not always — there are exemptions, deductions, and holding period rules that may reduce or even eliminate the tax.

Short-Term vs. Long-Term Capital Gains

Capital gains tax depends on how long you’ve held the property before selling.

Short-Term Capital Gains:
If you sell within 12 months of buying, your profit is taxed as regular income. This often means a higher tax rate.
Long-Term Capital Gains:
If you hold the property for more than 12 months, your profit is taxed at a reduced rate, often between 0% and 20%, depending on your income level and tax jurisdiction.

How to Calculate Capital Gains on Real Estate

Here’s a simplified formula:

Capital Gain = Selling Price – (Purchase Price + Expenses + Improvements)

Let’s say:

Purchase price: $300,000
Renovations: $50,000
Selling price: $500,000
Closing costs (purchase and sale): $10,000

Your gain would be:
$500,000 – ($300,000 + $50,000 + $10,000) = $140,000

You may have to pay tax on that $140,000.

Primary Residence Exemption

If you’re selling your primary home, you may not owe any capital gains tax at all.

In many countries (like the U.S.), there’s a capital gains tax exemption for your main residence:

Up to $250,000 tax-free gain for individuals
Up to $500,000 tax-free gain for married couples

To qualify, you must:

Have lived in the home for at least 2 of the last 5 years
Have not used the exemption on another property in the last 2 years

Capital Gains on Investment Properties

If the property is not your primary residence — for example, a rental property, vacation home, or land — you typically won’t qualify for the exemption.

Instead:

Your profits are fully taxable under capital gains rules
You may offset gains with capital losses
Depreciation recapture may apply — where previously claimed depreciation deductions are added back and taxed

Capital Gains Tax Rates (Sample Guide)

Rates vary by country and income bracket. Here’s a general example based on U.S. federal tax rules (2025):

Filing Status	0% Rate	15% Rate	20% Rate
Single	Up to $44,625	$44,626–$492,300	Over $492,300
Married Joint	Up to $89,250	$89,251–$553,850	Over $553,850

Note: Many countries, such as Canada, Singapore, UK, and Australia, have their own systems and tax rates. Always consult a local tax expert.

How to Reduce or Avoid Capital Gains Tax

Here are some strategies to reduce your tax burden:

1. Live in the Property First

Make it your primary residence for 2+ years to qualify for the exemption.

2. Use 1031 Exchange (U.S. only)

Reinvest the profits into another investment property to defer taxes.

3. Offset with Capital Losses

If you’ve sold other investments at a loss, you can use those to reduce taxable gains.

4. Increase Your Cost Basis

Track and include all eligible improvements (renovations, additions, upgrades) to reduce your taxable gain.

5. Hold for More Than 1 Year

Qualify for long-term capital gains rates instead of paying higher short-term income tax rates.

Capital Gains Tax for Foreigners

In many countries, foreigners selling property may also be subject to capital gains tax.

For example:

In Singapore, foreigners who sell property within 3 years of purchase may pay Seller’s Stamp Duty (SSD)
In the U.S., non-resident aliens may have to pay FIRPTA withholding tax upon sale

Check local rules or consult a real estate tax expert if you're a non-resident investor.

When Do You Pay Capital Gains Tax?

Usually, the tax is paid in the year you sell the property. Depending on your country, it may be part of your annual tax return or withheld at the time of sale.

In some cases, installment payments or estimated tax filings may be required.