Your House Made You Rich. Selling It Could Make the IRS Richer.

You bought the house in 1995. Maybe it was a stretch at the time: $210,000, a 30-year mortgage, and a kitchen that hadn't been updated since the Carter years.

Thirty years, two roofs, one addition and a lot of Saturday trips to Home Depot later, the kids are gone, the stairs are getting longer, and the realtor says the house is worth a little over $1 million.

Congratulations. Your house made you rich. Now here's the part nobody mentions at the open house: the tax break for selling a home hasn't moved since 1997, and in New Jersey a lot of long-time owners blow right past it.

The $500,000 rule, frozen in 1997

When you sell your main home, you can leave up to $250,000 of profit out of your taxable income if you're single, or up to $500,000 if you're married and file jointly. You qualify if you owned the home and lived in it for at least two of the five years before the sale.

Congress set those numbers in 1997. It replaced an older rule that gave sellers over 55 a one-time $125,000 break. The new limits were never tied to inflation, so they haven't budged in almost 30 years.

If they had kept up with inflation, the $500,000 limit would be worth about $1,045,000 today, and the single limit about $523,000. Meanwhile, the median single-family home in New Jersey sold for $615,000 so far this year.

New Jersey follows the same federal rules. Whatever's taxable for the IRS is taxable for the state, and New Jersey taxes that profit as regular income.

The New Jersey twist: the seller now pays the "mansion tax"

This one is new, and a lot of sellers don't know about it yet. Since July 10, 2025, New Jersey's extra fee on sales over $1 million is charged to the seller instead of the buyer, and it now goes up in steps:

• 1% of the full price for sales over $1 million, up to $2 million
• 2% from $2 million to $2.5 million
• 2.5% from $2.5 million to $3 million
• 3% from $3 million to $3.5 million
• 3.5% above $3.5 million

The fee applies to the entire price, not just the part over $1 million. Sell for $1,050,000, and that's $10,500, on top of the regular transfer fee sellers already pay.

Let's run the numbers on the 1995 house

Here's a simplified illustration for a married couple. These numbers are rounded, and yours will be different.

• Bought in 1995: $210,000
• Improvements over the years (an addition, a new kitchen, a roof, windows): $90,000
• Total cost, what the IRS calls "basis": $300,000
• Sale price: $1,050,000
• Selling costs (commission, attorney, transfer fees including the $10,500 mansion fee): about $75,000
• Profit: $1,050,000 − $75,000 − $300,000 = $675,000
• Tax-free amount: $500,000
• Taxable profit: $175,000

Now say the couple has about $100,000 of other income that year. Roughly:

• Federal capital gains tax at 15%: about $26,250
• The 3.8% investment surtax on income over $250,000: about $950
• New Jersey income tax on the profit: about $10,700

That's about $38,000 in income taxes, plus the $10,500 mansion fee, for a couple who thought the $500,000 break had them covered.

And there's a delayed bill. Medicare sets your premiums using your income from two years earlier. A one-time spike like this can push you into higher Medicare premiums two years later. We explained how that works in the IRMAA trap.

Seven ways to shrink the bill

1. Find every receipt. Improvements raise your cost basis and shrink your taxable profit: an addition, a new roof, a kitchen remodel, central air, new windows, a finished basement. Repairs and upkeep don't count, like painting or fixing a leak. Neither does an improvement you later replaced, like the 1998 roof you ripped off in 2015. In our example, every $10,000 of improvements you can document saves roughly $2,500 in taxes.
2. Know the surviving-spouse rule. If your spouse dies, you can generally still use the full $500,000 exclusion if you sell within two years of the death and haven't remarried. And the half of the house that belonged to your spouse usually gets its cost reset to its value at death, which can wipe out a big piece of the gain. Don't let grief and a rushed timeline cost you either one.
3. Consider whether the house should go to the kids. When heirs inherit a home, its cost basis generally resets to its value on the date of death. Thirty years of gains can disappear for tax purposes. New Jersey has no estate tax, and its inheritance tax doesn't apply to children or grandchildren. Keeping the house isn't right for everyone, especially if you need the money, but it belongs in the conversation.
4. Keep the rest of that year's income quiet. In the year you sell, think hard before doing a Roth conversion or taking a big IRA withdrawal on top of the sale. Pay for that year's spending from cash if you can.
5. Give from your IRA instead of your checkbook. If you're 70½ or older, a qualified charitable distribution sends money from your IRA directly to charity and keeps it out of your income, up to $111,000 in 2026. In a big-sale year, that helps.
6. Use investment losses. Losses from selling investments in a regular brokerage account can offset the taxable gain on the house. (A loss on your own home, sadly, isn't deductible.)
7. Mind the $1 million line, and the moving date. Because the mansion fee hits the full price once you go over $1 million, ask your agent and attorney how to price a house near that number. And if you're moving to Florida first, ask about New Jersey's rules for sellers who don't live in the state. They generally have to pay estimated tax at closing, at least 2% of the price, unless they qualify for an exemption, such as a principal-residence exemption.

Will Congress fix it?

Maybe. Bills have been introduced to double the limits and tie them to inflation (H.R. 1340), or to eliminate the cap entirely (H.R. 4327, the "No Tax on Home Sales Act"). The White House said in 2025 that it was considering the idea. As of today, those bills are still sitting in committee. Don't plan a sale around a law that hasn't passed.

Quick answers

How much profit on a home sale is tax-free?

Up to $250,000 for a single filer, or $500,000 for a married couple filing jointly, if you owned and lived in the home as your main residence for at least two of the five years before the sale.

Has the home sale exclusion ever gone up?

No. The $250,000 and $500,000 limits were set in 1997 and aren't adjusted for inflation. Adjusted for inflation, $500,000 from 1997 is worth about $1,045,000 today.

Who pays the mansion tax in New Jersey?

Since July 10, 2025, the seller pays it. The fee is 1% of the full price for sales over $1 million and goes up in steps to 3.5% for sales over $3.5 million.

Does New Jersey tax the gain on selling a house?

Yes, any profit above the federal exclusion. New Jersey follows the same $250,000 and $500,000 rules, and it taxes the rest as regular income.

Do home improvements reduce capital gains tax?

Yes. Capital improvements like an addition, a new roof or a kitchen remodel add to your cost basis and lower your taxable profit. Routine repairs don't. Keep the receipts.

For a lot of New Jersey retirees, the house is the biggest asset they own, and selling it is one of the biggest tax events of their lives. It deserves the same planning as the IRA. Join our Retirement Webinar: Setting the Stage for 2027, or talk with an advisor before you sign a listing agreement.

Sources: NJ Division of Taxation, sale of a residence, graduated percent fee memo (July 2, 2025) and nonresident seller estimated tax (TB-57); Congressional Research Service, The Exclusion of Capital Gains for Owner-Occupied Housing; Congress.gov, H.R. 4327 and H.R. 1340; U.S. Bureau of Labor Statistics, CPI-U (September 1997: 161.2; September 2026: 336.94); New Jersey Realtors, September 2026 data; IRS Publication 523, Selling Your Home. The sale example is a simplified, rounded illustration. It assumes married filing jointly, a 15% federal capital gains rate and 2026 New Jersey tax brackets, and your result will differ. Checked October 26, 2026. This is general information, not tax or legal advice. Talk with your tax professional and real estate attorney before you sell.