Married? Single? Divorced? Your Marital Status Can Impact Your Capital Gains Home Exclusion
Selling a Home? How the Capital Gains Exclusion Impacts You
Whether you're single, married, divorced, or widowed, understanding the rules surrounding capital gains taxes and the capital gains exclusion is crucial for making informed financial decisions. As your financial planner, I’m here to guide you through these important tax rules, which can save you a significant amount of money on the sale of your primary residence.
Income Tax vs. Capital Gains Tax – What’s the Difference?
Income tax is paid on earnings from employment, interest, dividends, royalties, or self-employment, whether those earnings are in the form of services, money, or property.
Capital gains tax is paid on income from the sale or exchange of an asset, such as a stock or property that’s categorized as a capital asset, such as real estate. While marginal federal income tax rates can be as high as 37% (as of 2025), long term (a year or more) capital gains rates are a more palatable rate of 0%, 15%, or 20%, with thresholds determined by your filing status and income, see below (brackets for tax year 2025).
0% Rate:
Single filers: Up to $48,350
Married filing jointly: Up to $96,700
Head of household: Up to $64,750
15% Rate:
Single filers: $48,351 to $533,400
Married filing jointly: $96,701 to $600,050
Head of household: $64,751 to $566,700
20% Rate:
Single filers: Over $533,400
Married filing jointly: Over $600,050
Head of household: Over $566,700
What Is the Capital Gains Exclusion on a Primary Residence?
While long-term capital gains tax rates are usually less painful than regular income tax rates, we still want to keep in mind how those taxes will come into play when we take a gain on (sell for profit) an asset such as a family home.
When you sell your primary residence, you may be able to exclude up to $250,000 in capital gains ($500,000 for married couples filing jointly) from your taxable income, provided you meet certain requirements. This is a powerful tax benefit, but it’s essential to understand how it works, especially if you’re in a situation involving divorce, widowhood, or other changes in your relationship status.
Here’s what you need to know:
The home must have been your primary residence for at least two of the last five years before the sale.
You can only use the exclusion once every two years.
This exclusion helps you avoid paying taxes on a significant portion of the profit from selling your home—something that can be incredibly beneficial during major life transitions.
Here’s an illustration of how the capital gains exclusion works: a couple owns a home in Annapolis and the property has appreciated a great deal since they’ve purchased it ten years ago. Their basis in the home is the amount they purchased the home for plus the cost of applicable major additions or renovations (subject to IRS rules). For this illustration, we will say their basis is $400,000. They sell the property for $1,100,000. Their gain on the home is $1,100,000-$400,000=$600,000. But if they are filing married/jointly, they would only owe capital gains tax on $100,000 ($600,000 gain minus the $500,000 exclusion for married filing jointly). The couple’s capital gains rate based on their income is 20%, so they would owe $20,000 of capital gains tax on the sale of the home. If it were a single person (divorce, widowed, or never married) selling that same house, they would only receive a $250,000 exclusion on the $600,000 profit. At the same capital gains tax rate of 20%, that person would owe 20% of $350,000 — $70,000. Same house. Same profit. Way bigger tax bill.
How Divorce Affects the Capital Gains Exclusion
Divorce introduces unique challenges when it comes to applying the capital gains exclusion, but understanding the rules can help you navigate the situation. Here’s how the exclusion might apply if you’re going through a divorce:
If You Sell the Home Together: If the home is sold as part of the divorce settlement, both spouses can potentially use the exclusion, assuming they meet the qualifications. Each spouse may exclude up to $250,000 (or $500,000 if filing jointly) of capital gains from the sale. Timing is important, and it’s essential to consider both your living situation and the length of time you’ve lived in the home.
If One Spouse Keeps the Home: If one spouse keeps the home and buys out the other’s interest, the spouse who remains in the home can still claim the exclusion if they meet the two-year residency requirement. The spouse who moves out typically loses the ability to claim the exclusion on a future sale of the property.
Special IRS Rule for Divorcing Couples: There is a special rule for divorcing or separated individuals that can help in certain cases. If the home is sold as part of the divorce, the IRS may prorate the two-year requirement, allowing you to claim part of the exclusion, even if you haven’t lived in the home for the full two years.
For example, if one spouse lived in the home for just one year before the divorce and the sale happens soon after, they might still qualify for a prorated portion of the exclusion.
Tax on Proceeds: If the home is sold after the divorce, both spouses may still benefit from the exclusion depending on how the proceeds are divided. Each spouse could exclude up to $250,000 (or $500,000 jointly). However, you’ll want to be aware of how this may impact any spousal support or other financial agreements.
What If You're Single or Widowed?
The rules for capital gains exclusion also apply if you're single or recently widowed, and understanding these rules can help you maximize your benefits when selling your home.
If You're Single: If you meet the two-year residency requirement, you can exclude up to $250,000 of capital gains from the sale of your primary residence. This can be a big advantage when selling a home and can help you keep more of your proceeds. Even if you're single and have recently divorced, the same exclusion applies as long as you meet the living-in-the-home requirement.
If You're Recently Widowed: If you're recently widowed, the capital gains exclusion still applies to you as long as you meet the residency requirements. The rules are the same as for a single individual. However, there's one important note: if your spouse passed away within the last two years and you haven’t yet sold the home, you may still be able to take advantage of the $500,000 exclusion (as if you were still filing jointly with your spouse) if you sell the home in that period. This can be a significant tax benefit during a difficult time.
Special Considerations for Widows/Widowers: If you inherited the home from your spouse, you may be eligible for an additional benefit known as the step-up in basis, which adjusts the value of the home to its market value at the time of your spouse’s death. This could reduce any potential capital gains if you sell the home in the future, which can provide substantial tax savings.
Things to Consider for Your Financial Planning
Whether you’re married, single, recently divorced, or widowed, understanding how the sale of your home fits into your overall financial strategy is key. Here are some important points to consider:
Review How Long You’ve Lived in the Home: If you’re married or divorced, or if your circumstances have recently changed, you’ll want to be sure you meet the two-year residency requirement to claim the exclusion. Timing matters when selling your home.
Partial Exclusion Possibilities: Even if you don’t meet the full two-year residency requirement, special exceptions for divorce or widowhood could allow you to claim a prorated exclusion, helping you reduce your tax burden.
Timing the Sale: The timing of your sale matters. If you're single, recently widowed, or divorced, planning when to sell your home can help ensure you qualify for the full capital gains exclusion. We can work together to develop the best strategy based on your individual situation.
Understand How the Sale Proceeds Affect Your Financial Situation: Whether you’re selling during a divorce or as a single individual, consider how the sale of your home fits into your overall financial goals. The proceeds could be used to help fund your next home, retirement, or other priorities. Additionally, in the case of divorce, make sure to understand how the sale may affect any alimony or support agreements.
Work with Tax and Legal Professionals: Since tax laws are complex, it’s always helpful to work with your attorney and a tax advisor to understand how the capital gains exclusion applies to your unique circumstances.
Key Takeaways
Whether you’re married, recently divorced, single, or widowed, the capital gains exclusion on your home can provide significant tax savings when selling. Here’s a quick recap of what to keep in mind:
If you sell your home, you may qualify for up to $250,000 (single) or $500,000 (married) in capital gains exclusion, provided you meet the residency requirements.
If you’re going through a divorce, the two-year residency requirement can be prorated in some cases, so you may still qualify for a portion of the exclusion.
Recent widows or widowers may be able to take advantage of the full $500,000 exclusion if the sale occurs within two years of their spouse's death.
Work with your financial planner, attorney, and tax professional to understand how the sale fits into your broader financial goals and ensure you’re making the most of the capital gains exclusion.
I’m here to guide you through the process and help you make sound decisions as you navigate these changes in your life. If you’re thinking about selling your home, let’s work together to develop a strategy that minimizes your tax liability and supports your financial goals. It all starts with a conversation.
