The Federal Capital Gains Exclusion — The Big One
If you've owned and lived in your home as your primary residence for at least 2 of the last 5 years, you can exclude up to $250,000 in capital gains from federal income tax ($500,000 for married couples filing jointly). This is called the Section 121 exclusion. Most Greater Cincinnati homeowners who've been in their home for 5+ years and are selling a primary residence will owe little to no federal capital gains tax.
How the Gain Is Calculated
Capital gain = sale price minus your adjusted cost basis. Your adjusted cost basis is your original purchase price plus the cost of significant improvements you made (kitchen renovation, addition, new HVAC system — these add to basis and reduce your gain) minus any depreciation you've taken (relevant only if you've ever rented the property). Keep records of every capital improvement you've made — it directly reduces your taxable gain.
When the Exclusion Doesn't Fully Apply
If your gain exceeds the exclusion ($250K / $500K), you'll owe capital gains tax on the excess. If you haven't met the 2-of-5-year primary residence test (you've been in the home less than 2 years, or you rented it for more than 3 of the last 5 years), the exclusion may be reduced or eliminated. Partial exclusions are available if you sold due to a qualifying change in employment, health circumstances, or unforeseen events.
Ohio State Tax on Home Sale Gains
Ohio taxes capital gains as ordinary income at Ohio's state income tax rates (which are graduated, topping out around 3.99% for high earners as of recent years). If you have a taxable gain after the federal exclusion, expect to owe Ohio state income tax on that gain as well. Talk to a CPA — the intersection of federal exclusion, Ohio state tax, and the timing of your sale can create real planning opportunities.
Investment Properties and the 1031 Exchange
Selling an investment property (not your primary residence) creates capital gains fully subject to federal and state tax. The Section 121 exclusion doesn't apply. However, if you're selling investment property, a 1031 exchange allows you to defer the gain by rolling proceeds into a like-kind replacement property within specific timelines (45 days to identify, 180 days to close). I own investment properties and work with clients on 1031 exchanges regularly — this is a conversation that should happen well before you list the investment property.