Capital Gains Tax on Real Estate: Clearing Up the Myths... From a CPA Who Explains This All Day Long

By Jeremy Underwood, CPA

One topic I get asked about a lot is capital gains tax on real estate. And honestly, I understand why—there’s a lot of noise out there. Between Google searches, well-meaning friends, and the guy in line at Home Depot, people end up believing rules that don’t actually exist.

So let’s walk through this in plain English. No jargon, no lectures. Just the stuff you actually need to know so you can plan wisely.

Myth #1: “If I sell my house, I automatically owe capital gains tax.”

Nope. Not even close.

In fact, most homeowners don’t pay capital gains on their primary residence.

Why? The IRS gives a pretty generous break called the Home Sale Exclusion.

If you’ve lived in the home for 2 of the last 5 years, you can exclude:

• $250,000 of gain if you’re single

• $500,000 if you’re married filing jointly

  
  

That’s gain, not sale price. Meaning: even if you sell for hundreds of thousands more than you paid, you might still owe nothing.

Myth #2: “I lived there 20 years ago—so I’m automatically covered.”

I wish. But no.

You must meet the 2-out-of-5-year rule right before the sale.

If you moved out and turned the home into a rental long ago, you may have lost the exclusion. It doesn’t mean you’re doomed—it just means your strategy needs to be more intentional.

Myth #3: “If it’s a rental, I’ll just pay gains on the profit.”

This is the one that catches people off guard.

When you sell a rental, you also have to account for something called depreciation recapture. Don’t let the name intimidate you—it simply means that the IRS wants to tax back part of the deduction you’ve been taking all those years.

You can still come out ahead (and often do), but it’s a piece of the puzzle many people forget to plan for.

So, what’s the bottom line?

Capital gains tax isn’t something to fear—it’s something to understand.

In fact, with the right planning, most people pay far less than they expect… and many pay nothing at all.

Here’s my best advice:

• Don’t assume rules based on what you heard from someone else.

• Don’t wait until after the sale to talk to a professional.

• Don’t make big real estate decisions without understanding the tax impact.

  
  

It’s your money. You should keep as much of it as possible—legally, strategically, and confidently.