How to Avoid Capital Gains Tax When Selling Your Home and Downsizing for Retirement
Published by Kuna Estates • Updated June 23, 2025
Thinking of selling your home and downsizing for retirement? If you’re expecting a large profit—say $640,000—it’s natural to be concerned about capital gains tax. The good news? There are strategies that may help you significantly reduce, or even eliminate, your tax burden.
At Kuna Estates, we help homeowners navigate real estate transactions with confidence, especially when they’re preparing for retirement. Here’s what you need to know.
Understanding Capital Gains Tax on Home Sales
Capital gains tax is applied when you sell an asset for more than you paid for it. This includes stocks, collectibles, investment properties, and yes—even your personal residence.
For homes, the IRS offers a valuable tax break:
- Married couples filing jointly: Exclude up to $500,000 in gains
- Single filers: Exclude up to $250,000 in gains
To qualify, you must have lived in the home for at least two of the past five years before selling.
Federal capital gains rates are typically 0%, 15%, or 20% depending on your income. Many states also tax capital gains as ordinary income.
Example: Selling for $640,000—What’s Taxable?
Let’s say you’re downsizing and your net gain from selling your longtime home is $640,000.
If You’re Married and Filing Jointly:
- $500,000 excluded
- $140,000 taxable
- At 15% rate: $21,000 owed
If You’re Single:
- $250,000 excluded
- $390,000 taxable
- At 15% rate: $58,500 owed
3 Proven Strategies to Reduce or Eliminate Capital Gains Taxes
If you’ve already maxed out the IRS exclusion, consider these legal strategies to reduce your capital gains liability:
1. Maximize Your Cost Basis
Your cost basis includes the original purchase price plus any qualified home improvements (e.g., additions, new roof, upgraded kitchen). Keeping receipts can significantly lower your taxable gain.
2. Offset Gains with Investment Losses
Consider tax-loss harvesting. Selling underperforming investments to realize losses can offset your home sale profits. A $40,000 loss could save you $6,000 in federal taxes at the 15% rate.
3. Leverage a 1031 Exchange (for Rental Conversions)
If you convert your home into a rental property for at least 2 years, you may qualify for a 1031 exchange. This lets you defer capital gains by reinvesting proceeds into a new rental property. Later, you could move into it and make it your primary residence.
Final Thoughts: Plan Early, Retire Smart
Downsizing in retirement can bring financial freedom, but smart tax planning is key. Whether you’re buying a smaller home, relocating, or planning to invest, knowing your capital gains exposure is essential.
Pro Tip: Consult a financial advisor or tax specialist to evaluate:
- Your eligibility for IRS exclusions
- Ways to harvest losses or increase your cost basis
- Whether a 1031 exchange fits your long-term strategy
At Kuna Estates, we work with trusted professionals to help you sell confidently and retire smarter.
Ready to Downsize and Retire? Let’s Talk
Looking to sell your home and start the next chapter of life with less stress and more cash in your pocket?
Contact Kuna Estates today for a personalized strategy that aligns with your retirement goals while minimizing your tax liability.