Capital Gains When You Sell Your Home

Most people selling a primary home in El Paso never owe a dollar of capital gains tax on it, and that's by design. The Section 121 exclusion lets a homeowner exclude up to $250,000 of gain, or $500,000 filing jointly, as long as the home was owned and used as a primary residence for at least two of the five years before the sale. For most sellers on the Westside or in the Upper Valley, that covers the entire gain outright.

El Paso's home values have climbed enough in some neighborhoods, and long-held properties enough in appreciation, that a seller can exceed the $250,000 or $500,000 threshold, particularly on a home owned for twenty or thirty years or one that's been substantially improved and resold. The portion of gain above the exclusion limit is taxed at standard long-term capital gains rates, the same rates that apply to any other long-held asset.

The residency test doesn't require two consecutive years, just two years total out of the five immediately before the sale. That matters for owners who moved out for a job relocation or a temporary stay elsewhere and then moved back before selling, since the clock isn't necessarily broken by a gap in occupancy. It does mean a home converted to a long-term rental and sold years later, without the owner ever moving back in, may no longer qualify for the full exclusion, since the clock only counts time spent living in the property as a primary residence.

A house that spent part of its life as a rental carries a wrinkle: any gain attributable to depreciation claimed during the rental period is recaptured separately and isn't covered by the Section 121 exclusion, even if the residency test is otherwise met. An El Paso owner who rented out a house for a few years before moving back in and eventually selling should expect the depreciation-related portion of the gain to be taxed regardless of the exclusion covering the rest.

A 1031 exchange is built for investment and business property, not a primary residence, so a straightforward home sale that qualifies for the Section 121 exclusion generally has no reason to involve one. The exception is a property with mixed use, part primary residence, part rental, where the rental portion may be eligible for exchange treatment while the residence portion uses the exclusion, a split that needs to be worked out with a CPA before listing rather than assumed after the fact. An El Paso duplex where the owner lived in one unit and rented the other is a common example of this split treatment in practice, and getting the allocation wrong can leave real money on the table at tax time.