What to Know About Capital Gains Before You Sell
A note before we begin: We are Oregon-based, real estate professionals, not accountants or tax advisors. This post is meant to give you a working understanding of how capital improvements factor into the sale of your home. For advice specific to your situation, please consult a CPA who works with real estate transactions.
One of the most common conversations we have with sellers who have owned their homes for a long time goes something like this: they have done significant work on the house over the years, they know they have a big gain coming, and they have no idea that the improvements they made might reduce what they owe in taxes.
Most people think of their capital gain as simply the difference between what they paid for the house and what they sell it for. The actual calculation is more nuanced than that, and understanding it could save you a meaningful amount of money.
What Is Your Cost Basis?
Your capital gain is not sale price minus purchase price. It is sale price minus your adjusted cost basis. Your basis starts with what you paid for the home, but it does not stop there. Certain capital improvements you made over the years can be added to that number, which raises your basis and reduces your taxable gain.
This is the piece most homeowners miss.
Your Selling Expenses Matter Too
Before you even get to basis, your selling expenses reduce the gain calculation. Real estate commissions, legal fees, advertising costs, and certain closing costs are all subtracted from your sale price before your gain is calculated. Most sellers focus on what they paid for the home and what they spent on improvements, but the cost of selling is also working in your favor.
Capital Improvements vs. Repairs
Not everything you spend on a home counts. The IRS draws a clear line between capital improvements and repairs or maintenance.
A capital improvement adds value to the home, extends its useful life, or adapts it to a new use. These can be added to your basis. Common examples include room additions, new roofs, HVAC systems, kitchen and bathroom remodels, new windows, and built-in appliances.
A repair or maintenance item keeps the home in its current condition but does not add value. Repainting a room, fixing a leaky faucet, and replacing a broken window generally do not qualify.
There is one useful exception worth knowing. If repair-type work is done as part of a larger remodeling project, it can qualify as an improvement. Replacing a single broken window is a repair. Replacing every window in the home as part of a larger project is an improvement. The scope of the work matters.
The second story addition on your home? That is a textbook capital improvement.
A Real World Example
Let's say you bought a 900 square foot home in Portland in 1998 for $185,000. In 2002 you added a second story master suite, doubling the home to 1,800 square feet at a cost of $125,000. Now it is 2026 and the market says your home is worth $750,000.
Without accounting for the addition, your gain looks like this:
$750,000 sale price minus $185,000 purchase price equals $565,000 in gain.
A married couple filing jointly can exclude up to $500,000 of gain on the sale of a primary residence they have lived in for at least two of the last five years. That would leave $65,000 potentially subject to tax.
But when you add the cost of the addition to your basis, the picture changes:
$185,000 plus $125,000 equals an adjusted basis of $310,000.
$750,000 minus $310,000 equals $440,000 in gain.
That falls entirely within the $500,000 married exclusion. The same seller who appeared to have a taxable gain now may owe nothing, simply by accounting for the work they did two decades ago.
Other qualifying improvements made over the years, a new roof, updated kitchen, or new HVAC system, would reduce that number further. And remember, selling expenses like your agent's commission come off the top as well.
Because in our book, a well-informed seller is an empowered one.
The Primary Residence Exclusion
If you have lived in the home as your primary residence for at least two of the last five years, you can exclude up to $250,000 in gain as a single filer or up to $500,000 as a married couple filing jointly. One important detail: you can only use this exclusion once every two years. If you sold another home and took the exclusion within the past two years, you may not qualify for the full exclusion on this sale.
Gain above the exclusion threshold is taxable. Federally, long-term capital gains are taxed at 15% or 20% depending on your income. Oregon taxes capital gains as ordinary income, adding up to another 9.9%. Combined, sellers in higher income brackets can expect to pay roughly 25% or more on taxable gain, which is exactly why understanding your adjusted basis matters.
Some higher earners may also be subject to an additional 3.8% federal Net Investment Income Tax, pushing the combined rate above 30%. This is another reason a conversation with a CPA before you list is worth the time.
Many sellers will owe nothing at all. But the ones who have owned for a long time, made significant improvements, and have seen substantial appreciation are the ones who most need to understand how their basis is calculated.
The Recordkeeping Problem
Here is where we see sellers leave money on the table. By the time they are ready to sell, they cannot find the permits, invoices, or contractor receipts from work done ten or twenty years ago. Without documentation, it becomes very difficult to substantiate what you spent.
Our advice to every homeowner, whether you are planning to sell soon or not: keep a folder, physical or digital, with permits and paid invoices for every capital improvement you make. Hold onto it for as long as you own the home. It is one of those things that takes almost no effort to maintain and can matter a great deal when you eventually sell.
What to Do Next
If you are preparing to sell and you have made significant improvements over the years, the single best step you can take is to sit down with a CPA who works with real estate transactions before you list. Bring whatever documentation you have. Even partial records are better than none.
The IRS publishes a plain-language guide called Publication 523 that covers the primary residence exclusion, what qualifies as a capital improvement, and how to calculate your adjusted basis. It is worth a read and you can find it here.
We are happy to talk through the real estate side of your sale and connect you with trusted professionals who can help with the tax side. That is the kind of planning that makes the whole process go more smoothly.
Licensed Oregon Realtors
Selling in Portland? Let’s make your move a smart one.
Kim Campbell and Francisco Salgado are Portland-based real estate agents known for clear communication, honest advice, and deep knowledge of the local market. We work with sellers and buyers across the Portland metro area. Ready to chat about what your home might be worth? Call or text us at 503-951-8547 to schedule a complimentary consult.
