Capital Gains on a Home You've Owned for Decades: Figuring Your Gain Before You Downsize

Most people who downsize from a home they've lived in owe no capital gains tax, because the IRS lets you exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly. A home owned for decades is the exception worth checking, and the gain is figured from your adjusted basis, so your improvement records and an old rollover from before 1997 can change the answer.

I'm Dennis Mark Interdonato with The Dennis Mark Group. I'm not your accountant, and nothing here replaces one. What I can do is show you why this question matters before you set a list price, using the IRS's own rules, so the conversation with your tax professional starts early instead of after closing.

How does the home sale exclusion work?

If you owned the home and lived in it as your main home for at least 24 months of the 5 years before the sale, and you didn't exclude gain on another home in the 2 years before, you can generally exclude up to $250,000 of gain. A married couple filing jointly can exclude up to $500,000 if either spouse meets the ownership test and both meet the residence test (IRS Publication 523; IRS Topic 701).

New Jersey figures the gain the same way and follows the same exclusion for a principal residence (NJ Division of Taxation). So the question is the same at both levels: is your gain bigger than your exclusion?

Why does a long-owned home need a second look?

Because time works on both sides. Over a few decades, the gap between what you paid and what a buyer pays today can grow large, and the paperwork that shrinks your gain has had decades to get lost. Your gain isn't the sale price minus the purchase price. It's what you realize from the sale minus your adjusted basis, and both sides of that subtraction have pieces people forget.

What counts toward your adjusted basis?

Your basis starts with what you paid for the home. Improvements that add value, extend its life or adapt it to new uses are added on top. Publication 523 lists examples, including:

• Additions such as a bedroom, bathroom, deck, garage or porch
• A new roof, new siding, storm windows and doors, insulation
• A heating system, central air, a water heater, new wiring or plumbing
• Kitchen modernization, built-in appliances, flooring
• A driveway, fence, retaining wall, landscaping or a pool

Some things don't count. Repairs and maintenance that keep the home in good condition, like painting or fixing leaks, aren't added. Neither is an improvement that's no longer part of the home, like carpet you installed and later replaced. And if you received an energy credit or utility subsidy for an improvement, that amount comes back off your basis (IRS Publication 523).

As a former New Jersey home builder and remodeler, I can tell you most long-time owners have done more to their homes than they remember. The roof you replaced in 2004 and the kitchen you redid in 2012 are real money on this worksheet, if you can document them.

What is the pre-1997 rollover, and why does it matter now?

Publication 523's basis worksheet includes a line for "any gain you postponed from the sale of a previous home sold before May 7, 1997." Under the old rules, owners could postpone the gain from one home sale by buying another home. If you did that when you bought your current home, the postponed gain lowers your basis today, which raises your gain on this sale.

If you bought your current home before 1997 by selling another one, find that year's tax return or ask your tax professional to. It's the piece of this puzzle most likely to surprise a long-time owner.

What reduces the amount you realize?

Selling expenses come off the sale price. Publication 523 lists sales commissions, advertising, legal fees and loan charges you paid that would normally be the buyer's. It also says that transfer taxes and fees you pay as the seller, like New Jersey's realty transfer fee, can be treated as selling expenses.

What does that look like with numbers?

Here's a made-up example, not anyone's real sale. A couple bought their home in 1994 for $180,000, put $90,000 of documented improvements into it over the years, and sells it for $780,000 with $45,000 in selling expenses.

• Amount realized: $780,000 minus $45,000 = $735,000
• Adjusted basis: $180,000 plus $90,000 = $270,000
• Gain: $465,000, under the $500,000 joint exclusion, so no taxable gain if they meet the tests

Now change two facts. If one owner sells alone and qualifies for the $250,000 exclusion, $215,000 of that gain is taxable. If the couple had postponed $60,000 of gain from a home they sold in 1994, their basis drops to $210,000, their gain rises to $525,000, and $25,000 is over the joint exclusion. Same house, same price, different answer.

What records should you gather before you list?

• Your closing statement from the purchase
• Receipts, contracts and permits for improvements still in the home
• Any tax return showing a postponed gain from a home sold before May 7, 1997
• Records of energy credits or utility rebates you received

The IRS says to keep records that support your basis, generally until 3 years after the due date of your tax return for the year you sell (IRS Publication 523). Start collecting them while you're still deciding, and bring them to your tax professional along with my market evaluation from the home value step.

Frequently Asked Questions

Does buying a cheaper home change the tax on the one I sell?

The exclusion rules in Publication 523 don't depend on buying another home or on its price. The tax question is about the home you're selling: your gain and whether you meet the tests.

Do I have to report the sale if no tax is due?

If you receive a Form 1099-S for the sale, Publication 523 says you report it on Form 8949 even if you have no taxable gain. Your tax professional handles the forms.

What if I don't have receipts for old improvements?

Ask your tax professional what else can document the work, such as permits, contracts or bank records. Undocumented improvements are hard to count.

What if my spouse has died?

Different rules can apply to a surviving spouse. See selling the house after a spouse dies in New Jersey and ask your tax professional.

This is general information, not legal, tax or lending advice. The rules come from IRS Publication 523, IRS Topic 701 and the NJ Division of Taxation guide linked above, checked October 10, 2026. Your tax professional applies them to your sale.

About the author

Dennis Mark Interdonato is a REALTOR® and Master CDRE® who leads The Dennis Mark Group at Keller Williams Realty Ocean Living in Point Pleasant, NJ, helping buyers and sellers throughout New Jersey make their next move, with Monmouth and Ocean County as home base. Read more about Dennis Mark.

Keep reading

• How Dennis Mark plans a downsizing move and the Downsizing Guide
• When I sell my home, do I pay tax? The New Jersey basics
• Which upgrades add value in New Jersey
• Selling and moving out of New Jersey: the payment at closing
• Have a question this didn't answer? Send it to Dennis Mark and it may become the next article.