Will I owe capital gains tax when I sell my longtime Colorado Springs home?

Often not. If you've owned and lived in the home as your main residence for at least two of the last five years, you can generally exclude up to $250,000 of gain, or $500,000 if you're married filing jointly. On a home you've owned for decades, the gain can exceed that, and what counts as gain depends on your purchase records and improvements. Colorado taxes any taxable gain as regular income. It's worth talking with a CPA before you list, because timing, a spouse's death, and Medicare premiums can change the math.

How the home sale exclusion works

Federal law lets you exclude part or all of the gain from selling your main home. This is often called the Section 121 exclusion.

• The limit: up to $250,000 of gain if you file single, or up to $500,000 if you're married filing jointly.
• The two-year tests: during the five years before the sale, you owned the home for at least two years and lived in it as your main home for at least two years. The two years of living there don't have to be in one block.
• How often: generally once every two years.

If your gain is under the limit and you meet the tests, you usually owe no federal tax on the sale. If you receive a Form 1099-S from the title company, report the sale on your tax return even if the whole gain is excluded.

Why a longtime home can go over the limit

The exclusion hasn't changed since it was created in 1997, but home values have. On a home bought decades ago, the gain can be larger than people expect.

Your gain isn't simply the sale price minus what you paid. It's roughly:

Sale price, minus selling costs, minus your adjusted basis.

Your adjusted basis starts with what you paid for the home, including certain purchase costs, and goes up with improvements that add value or extend the home's life, such as a new roof, an addition, or a remodeled kitchen. Routine repairs and maintenance don't count.

Hypothetical example. A couple bought their home decades ago for $180,000 and put $60,000 into improvements over the years. They sell for $650,000 and pay $40,000 in selling costs. Their gain is about $370,000 ($650,000 − $40,000 − $240,000). Married filing jointly, it's fully excluded. If one of them were selling alone as a single filer, about $120,000 could be taxable. (Illustration only; your numbers and your CPA's calculation will differ.)

That's why records matter. The difference between a taxable gain and no tax can come down to whether you can document the improvements.

When the math changes

After a spouse dies

This is the situation that surprises families most.

• The $500,000 limit for a surviving spouse generally applies only if you sell within two years of your spouse's death, haven't remarried, and meet the other tests. After that, you're generally limited to $250,000 as a single filer.
• Part of the home may get a new basis. When a spouse dies and the couple owned the home together (outside a community property state, which Colorado isn't), the half that belonged to the spouse who died generally takes a new basis equal to its value on the date of death. Your half keeps its original basis. That can shrink the taxable gain considerably.
• How the title is held matters. Joint tenancy, a trust, or another arrangement can change the result. That's a question for a CPA and an estate attorney.

If you've recently lost a spouse, there's no need to rush. But it's worth learning about the two-year window early so it's a choice rather than a surprise.

If you move into care first

If you become unable to care for yourself and move into a licensed care facility, such as a nursing home, the time there can count toward the two-year residence test, as long as you lived in the home for at least one year during the five years before the sale. See whether to sell before moving into senior living.

If the home was ever a rental or office

Any depreciation taken after May 6, 1997, for renting the home or using part of it as a business office, is taxable even when the rest of the gain is excluded. Time the home was a rental may also reduce the exclusion.

If you served in the military

Service members and some other federal employees on qualified official extended duty can suspend the five-year window for up to 10 years, which can preserve the exclusion on a home they left for orders. See whether Guardians should buy if they may be assigned here again and whether to sell or rent your home when you PCS.

If you gift the home instead

A home you give to your children generally keeps your original basis, while a home they inherit generally gets a new basis at its value on the date of death. That difference can be large, which is why gifting a home is a decision for your CPA and estate attorney. See whether to sell, gift, or leave your home to your children.

The tax that shows up two years later: Medicare premiums

A home sale can also affect your Medicare premiums, which is a separate issue from capital gains tax. If you're on Medicare, your Part B and Part D premiums are adjusted by income, and Social Security uses your tax return from two years earlier to set them. A taxable gain in the year you sell can raise your premiums two years later. This surcharge is often called IRMAA.

Social Security lets you ask for a reduction after certain life-changing events, such as the death of a spouse or stopping work. Selling a home isn't one of them.

How I help you think it through

This is why we go through the Life → Wealth → Real Estate™ method in order. First, we understand the life goal. Then: have you considered all of your wealth aspects, including your taxes? If you no longer have a paycheck, the Medicare surcharge is a big one to be aware of, because it comes two years after the sale.

I've seen the tax side change the plan. A client whose retirement was built on a portfolio of rental properties chose, on her CPA's recommendation, to space out the sales of her rentals rather than sell them all at once. The goal was the same; the timing changed because of the taxes.

I'm not a CPA, and your tax situation is your CPA's to calculate. What I can do is make sure the right questions get asked before the home is listed, and build the sale timeline around the answer. See who should be on your downsizing team.

What's specific to Colorado Springs and El Paso County

• Colorado taxes the gain as income. Any gain that isn't excluded is generally included in your Colorado taxable income. Colorado's separate capital gain subtraction has been limited to farmers selling agricultural land since 2022, so it won't apply to a typical home sale.
• Selling after you've moved out of state. If you no longer live in Colorado when you sell, the title company may have to withhold part of your proceeds for Colorado income tax, with exceptions such as a sale of your principal residence. See what it costs to sell a home in Colorado Springs.
• Rebuilding records for an older home. If your purchase paperwork is gone, the deed recorded with the El Paso County Clerk and Recorder often shows the documentary fee paid at purchase, which is based on the price (one cent per $100 in Colorado). The Pikes Peak Regional Building Department's permit history can help document major improvements such as roofs, additions, and remodels. Your CPA can tell you what's enough.
• Property taxes are a separate question. If you have Colorado's senior property tax exemption, it doesn't follow you to the next home. See how the senior property tax exemption works.

A simple way to think it through

• If your likely gain is well under $250,000 (or $500,000 married), the exclusion probably covers it. Confirm with a CPA, and keep your records.
• If your gain may be near or over the limit, gather your purchase and improvement records and meet with a CPA before you list.
• If your spouse has died, find out when the two-year window closes and how the title was held.
• If you're on Medicare or will be within two years, ask your CPA how a taxable gain would affect your premiums.
• If the home was ever a rental, ask about depreciation and nonqualified use before setting a price or a timeline.

What could change the answer

• Your filing status. Single and married limits differ, and a spouse's death changes both the limit and the basis.
• Your records. Documented improvements raise your basis and lower your gain.
• Past rental or business use. Depreciation is taxable even when the rest of the gain is excluded.
• Timing. The two-year tests, the surviving spouse window, and Medicare's two-year look-back all depend on the sale date.
• Tax law. Federal and Colorado rules can change; confirm current rules with a CPA.

When to talk with a professional

A CPA is the right person to calculate your gain, confirm whether you qualify for the exclusion, and model the timing, including Medicare premiums. An estate attorney can explain how the title or a trust affects your basis and your plan. A financial planner can help decide what the proceeds need to do next. A real estate professional can estimate what the home is likely to sell for and what it will cost to sell, so your CPA has realistic numbers to work with.

Sources

• Internal Revenue Service, Publication 523 (2025), Selling Your Home: https://www.irs.gov/publications/p523
• Social Security Administration, Medicare Premiums: Rules for Higher-Income Beneficiaries: https://www.ssa.gov/benefits/medicare/medicare-premiums.html
• Colorado Department of Revenue, Income Tax Topics: Colorado Capital Gain Subtraction: https://tax.colorado.gov/income-tax-topics-colorado-capital-gain-subtraction