One year ago today, on July 4th, 2025, a sweeping tax law was signed that set the rules many retirees will live under for years, including the estate tax numbers we will talk about in tomorrow's finale. It is a fitting day for part two of The Fourth Color, because today is about a different kind of independence: knowing, before you ever list the house or the rental, exactly what the sale will cost you. Yesterday we introduced purple money, the real estate on your balance sheet, and the idea that it is taxed mainly at the exits. Today we walk through the first exit, the sale, and the three surprises waiting there.
Do people over 65 pay capital gains when they sell their house?
Yes. There is no special capital gains exemption for selling your home after age 65, even though many people remember one. The rule today is age-neutral: homeowners of any age can generally exclude up to 250,000 dollars of gain on a primary residence, or 500,000 for a married couple filing jointly, if they owned and lived in the home for at least two of the last five years. Gain above that is taxable.
The memory is not imagined, by the way. Before 1997, there really was a one-time exclusion reserved for home sellers age 55 and older. The Taxpayer Relief Act of 1997 repealed it and replaced it with today's rule, which is more generous in most ways: it applies at any age, and you can use it repeatedly rather than once in a lifetime. But the old rule left behind a stubborn belief that age is what earns you the break, and from the conversations our advisors have, that belief is alive and well nearly thirty years later. People search for it, plan around it, and sometimes delay a sale waiting for a birthday that changes nothing.
Why the exclusion feels smaller than it used to
Here is the part that surprises even people who know the rule. Those exclusion amounts, 250,000 and 500,000 dollars, were set in 1997 and have never been adjusted for inflation. Home prices have not stood still for those thirty years. A couple who bought a home decades ago in a neighborhood that took off can easily be sitting on a gain well past 500,000 dollars, and every dollar above the exclusion is a taxable long-term capital gain in the year of the sale.
What does that tax look like? For 2026, long-term capital gains are taxed at 0, 15, or 20 percent depending on your income. For a married couple filing jointly, the 15 percent rate generally applies to taxable income between roughly 98,900 and 613,700 dollars, with 20 percent above that. And a large gain can stack another layer on top: the 3.8 percent net investment income tax generally applies once modified adjusted gross income passes 250,000 dollars for a joint return, 200,000 for a single filer, thresholds that have not moved since 2013. A home sale with a large gain can push an otherwise modest-income retiree through several of these lines in a single year.
Before anyone panics, remember the other side of the math: your gain is not the sale price. It is the sale price minus what you paid and, importantly, minus the cost of improvements you made over the years. The addition, the new roof, the remodeled kitchen, all of it raises your basis and shrinks the taxable gain. This is why our advisors gently nag people to keep home improvement records for decades. The shoebox of receipts in the garage can be worth real money.
Does selling your house affect your Medicare premiums?
This is the surprise almost no one sees coming, and it arrives on its own schedule. Medicare premiums for higher-income retirees include a surcharge called the Income-Related Monthly Adjustment Amount, or IRMAA. What catches home sellers is how it is calculated: IRMAA is based on your tax return from two years earlier. Sell a property with a large taxable gain in 2026, and in 2028 Medicare looks back at your 2026 income and bills you accordingly, for both spouses if you are married, for that full year.
And yes, capital gains count. IRMAA runs on modified adjusted gross income, which includes taxable capital gains. The taxable part of a home sale, and all of the gain on a rental, lands in that number. The surcharge works on a cliff, too: crossing an income threshold by a single dollar triggers the full higher premium tier. In 2026 the first threshold sits at 218,000 dollars of income for a joint return, 109,000 for a single filer, so a big sale year can vault a couple several tiers up at once. The good news is that it is generally a one-year visit. Your premium is recalculated each year from that year's look-back, so when your income returns to normal, so does your premium. But it is far better to know the bill is coming, and to plan the timing of a sale around it, than to open the letter two years later and wonder what happened.
What about selling a rental property?
Rentals play by harsher rules, and this is where the couple from part one, with the cabin and the rental portfolio, were wise to ask questions before selling. First, the home-sale exclusion generally does not apply to a rental. There is no 250,000 or 500,000 dollar cushion; the gain is on the table from the first dollar. Second, all those years of depreciation deductions, one of the great tax benefits of owning a rental, are partly reclaimed at sale. The portion of your gain that came from depreciation is taxed at a higher rate than the rest, up to 25 percent, and the rules generally apply whether or not you remembered to claim the depreciation along the way. Owners who held a property for twenty years are often startled by how much of the sale price that covers.
There are legitimate strategies around all of this: timing a sale for a lower-income year, spreading gain across years, offsetting it against other losses, exchanging one investment property for another, or, as we will see tomorrow, sometimes not selling at all. Which one fits is exactly the kind of question that depends on your whole picture, your income, your other accounts, your family's intentions for the property, and it deserves an afternoon with someone who models these trade-offs every day rather than a rule of thumb from an article, including this one.
Does capital gains count as income for Medicare premiums?
Generally, yes. The Medicare surcharge known as IRMAA is based on modified adjusted gross income from your tax return two years prior, and that figure includes taxable capital gains. The portion of a home-sale gain above the exclusion, and the gain on the sale of a rental or other investment property, both count. A one-time spike in income typically means a one-year increase in premiums two years later.
What is the capital gains tax rate for 2026?
Long-term capital gains, on assets held longer than a year, are taxed at 0, 15, or 20 percent depending on taxable income. For 2026, a married couple filing jointly generally pays 0 percent up to about 98,900 dollars of taxable income, 15 percent up to about 613,700, and 20 percent above that. High earners may also owe the 3.8 percent net investment income tax. Short-term gains, on assets held a year or less, are taxed as ordinary income.
How can I reduce capital gains tax when I sell my house?
Start with your records: every dollar of documented home improvement raises your basis and directly shrinks the taxable gain. Confirm you meet the two-of-five-year test so the full exclusion applies. Beyond that, the biggest lever is usually timing, choosing a sale year when your other income is lower, which affects both the capital gains rate and the Medicare look-back two years later. The right combination depends on your full financial picture, which is worth mapping out with a professional before you list, not after you close.
The thread running through all of this is simple: the tax on a lifetime of appreciation is not really determined the year you sell. It is determined by what you kept records of, what year you choose, and what the rest of your income looks like when you do. Those are all things you can steer, but only ahead of time. Tomorrow, in the finale, we look at the other exit, the one where the house never gets sold at all: what happens when property passes to the next generation, the gifting rules almost no one has heard of, and why most families will not owe a dime of federal estate tax under today's rules. If a sale is anywhere on your horizon and you would like to see the whole picture first, our team at American Retirement Advisors is at 602-281-3898.
Disclaimer: The information in this article is for educational purposes only and does not constitute tax, legal, or investment advice. Tax laws change frequently, and individual circumstances vary. American Retirement Advisors does not provide tax or legal services. Before making any tax-related decisions, consult a qualified CPA, tax attorney, or financial planner who can evaluate your specific situation.