There’s probably more confusion among our clients about the tax on capital gain than any other tax. So, we wrote a primer on how it works, including how capital gain is calculated, the step-up in basis, and the $250,000 exclusion on the sale of a personal residence. You can download it (along with our other legal guides) here.
But here are a few highlights:
- Capital gain is the difference between the sale price of an item and its “basis.”
- “Basis” starts as the items purchase price.
- But it might be adjusted, principally by:
- The cost of improvements to real estate.
- A step-up to the date-of-death value upon the death of the owner.
- Depreciation.
- The first $250,000 of gain on the sale of a personal residence is excluded, $500,000 if it’s sold by a husband and wife.
- The federal taxable gains tax rate ranges from zero to 20% depending on the taxpayer’s income, but for most people it’s 15%. For a single individual in 2025, the 15% rate applies to incomes between $48,351 and $533,400 and for married couples the range is $96,701 to $600,050. The zero and 20% rates apply to those with incomes, respectively, below and above these ranges.
- Note that if your income including realized capital gains from the sale of assets is below the $48,350 and $96,700 thresholds that there’s no tax. This allows some lower income taxpayers to gradually sell appreciated assets, usually stock holdings, without incurring a tax.
- Massachusetts taxes capital gain like ordinary income, so the rate is 5% up to $1 million and 9% above $1 million. (An argument of those who opposed the “millionaire’s tax” was that in Massachusetts the high price of real estate could easily push people selling their homes into the higher bracket, but I think that applies to very few homeowners given the $500,000 exclusion for married couples selling their homes.)
That’s the basics. For a more detailed explanation, check out our primer. If you have questions, you can post them on the AskHarry.info website.