For the sale of a primary residence in 2025/2026, you can exclude up to $250,000 in profit ($500,000 for married couples) from capital gains tax if you lived in the home for at least two of the five years before selling. For investments, a 0% tax rate applies if your total taxable income is below certain thresholds ($49,450 for singles in 2026).
The 20% rule for capital gains refers to the highest federal tax rate for long-term capital gains, applying to higher income brackets when you sell investments (stocks, real estate) held for over a year, with lower rates of 0% and 15% for lower incomes, and even higher rates for special assets like collectibles. This rate kicks in for single filers earning over approximately $492,300 (2024) or $533,401 (2025), and higher for joint filers, making holding assets over a year a key tax strategy.
How is Capital Gains Tax calculated? Each tax year you can make a set amount in capital gains before paying any tax – this is known as the 'annual exempt amount', or more simply your 'CGT allowance'. This tax year (2025/2026) it's £3,000. You only pay tax on any gain over your allowance each tax year.
The seller must have owned the home and used it as their principal residence for two out of the last five years (up to the date of closing). The two years don't have to be consecutive to qualify. The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion.
A common way to defer or reduce your capital gains taxes is to use tax-advantaged accounts. Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes on assets while they remain in the account.
Capital gains tax rates
A capital gains rate of 0% applies if your taxable income is less than or equal to: $48,350 for single and married filing separately; $96,700 for married filing jointly and qualifying surviving spouse; and. $64,750 for head of household.
The "6-year rule" for Capital Gains Tax (CGT) in Australia allows you to treat a former main residence as tax-exempt for up to six years after you move out, even if you rent it out, enabling you to avoid CGT on any growth during that period. You qualify by moving out, choosing to treat it as your main home for tax, and can reset the rule by moving back in. If you rent it out for longer than six years, only the portion of the gain after the six-year mark becomes taxable.
You can avoid or minimize capital gains tax by holding assets over a year for lower long-term rates, using tax-advantaged accounts (like Roth IRAs/401(k)s), donating appreciated assets to charity, using tax-loss harvesting to offset gains, or leveraging primary residence exclusions for your home, but completely avoiding tax often involves specific strategies like Qualified Opportunity Zones or 1031 exchanges for real estate.
The "5-year rule" for capital gains tax primarily refers to the IRS's 2-out-of-5-year test for excluding gain on the sale of a primary residence, requiring you to have owned and lived in the home for at least two of the five years before selling it to exclude up to $250k (single) or $500k (married filing jointly) of profit. There are also rules for investment properties, like 1031 exchanges, which involve holding periods, and state-level exceptions, but the main federal rule is for your primary home.
Subtract your basis (what you paid) from the realized amount (how much you sold it for) to determine the difference. If you sold your assets for more than you paid, you have realized capital gains amount.
Make maximum use of tax-efficient wrappers
The simplest way to reduce capital gains tax is to invest within an individual savings account (ISA). The ISA allowance is currently £20,000 a year3 and all growth and income within the ISA is free from CGT and income tax.
Capital gains tax may apply to any asset you sell, whether it is an investment or something for personal use. If you sell something for more than your "cost basis" of the item, then the difference is a capital gain, and you'll need to report that gain on your taxes.
The amount of tax-free capital gain depends on the asset, but the most common exemption is for your primary home, allowing single filers to exclude up to $250,000 (or $500,000 for married couples) of profit if you've lived there 2 of the last 5 years. Additionally, certain long-term investments in qualified small businesses or Opportunity Funds, plus gains on inherited assets (due to stepped-up basis at death), can also be tax-free, while lower income levels may qualify for a 0% long-term capital gains tax rate.
If you've owned the asset for a year or less, your gain will be taxed as ordinary income, with rates currently as high as 37%. For stocks or bonds you've owned for more than a year, you could face a capital gains tax as high as 20%1 on your profits (rates vary depending on your income).
How Wealthy Households Use a “Buy, Borrow, Die” Strategy to Avoid Taxes on Their Growing Fortunes
The "36-month rule" for capital gains tax (CGT) primarily refers to the UK's Principal Private Residence (PPR) Relief, where the final 36 months (or 9 months for most) of a property's ownership period are tax-exempt, even if not lived in, provided it was a main home at some point. In the US, the relevant rule for home sales is the "2-out-of-5-year rule" for the Section 121 exclusion, allowing up to $250k/$500k profit tax-free if owned and used as a main home for 2 of the 5 years before sale, with exceptions for unforeseen circumstances.
Exemption under Section 54EC
Section 54EC provides that you do not have to pay LTCG tax on the sale of any long-term capital assets if the capital gains are invested in the designated government bonds and instruments. The bonds must be purchased within six months following the asset's sale.
Here's how you can avoid Capital Gains Tax (legally)? 1/ If the property is your family home (Principal Residence). If you sell your main home, you can claim exemption— but you must use the proceeds to buy/build another family home within 18 months. 2/ Apply for a BIR Certificate of Exemption.
To qualify for 0% capital gains tax, you must have long-term capital gains (assets held over a year) and your taxable income (after deductions) must fall below specific IRS thresholds, which change annually but are roughly <$48,350 for single filers and <$96,700 for married filing jointly for the 2025 tax year, allowing for higher total income when combined with deductions like the standard deduction. The key is keeping your adjusted gross income (AGI) low enough so that after subtracting deductions, your taxable income remains within these limits.
On a $100,000 capital gain, you'll likely pay 15% for long-term gains, resulting in about $15,000 in federal tax (plus potential state tax), but it could be 0% or 20% depending on your total taxable income and filing status, while short-term gains are taxed as ordinary income (potentially 22-24%).
Qualifying for the exclusion
You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods.
Previously, individuals could exempt up to Rs. 1 lakh in gains from taxation, but this limit has been raised to Rs. 1.25 lakh. These changes aim to provide more benefits to middle and lower-income individuals by allowing them to keep more of their capital gains tax-free.