Most Madison sellers don't. If you owned and lived in the home as your main residence for at least two of the last five years, you can exclude up to $250,000 of gain from federal tax, or $500,000 if you're married filing jointly. Gain above that is taxable, and Wisconsin taxes it as income after a 30% deduction for long-term gains.
By Cait Berry | November 11, 2026
This question comes up most with sellers who have been in their homes a long time. If you bought in Nakoma, Shorewood Hills, or Maple Bluff twenty or thirty years ago, your home may be worth two or three times what you paid. That's great news, and it's also the moment people start asking, "Will I owe taxes on all of that?"
Here's how it works, with real math, so you can walk into a conversation with your tax preparer already knowing the right questions. I'm not a CPA, and this isn't tax advice. It's the framework I walk my sellers through before we ever talk about a list price.
The home sale exclusion, in plain English
The federal rule (Section 121 of the tax code) lets you exclude gain on the sale of your main home if you pass two tests:
- Ownership: you owned the home for at least 24 months of the 5 years before closing.
- Use: you lived in it as your main home for at least 24 months of those same 5 years. The two years don't have to be in a row.
If you pass, you can exclude up to $250,000 of gain if you're single, or $500,000 if you're married filing jointly. For a married couple, only one spouse needs to meet the ownership test, but both need to meet the use test for the full $500,000.
Two more rules worth knowing:
- You can generally use the exclusion once every two years.
- Those limits haven't changed since 1997. They aren't indexed for inflation, which is why more long-time Madison owners are bumping into them than ever before.
You may have seen headlines about a bill to eliminate capital gains tax on home sales. As of this writing, it's a proposal, not law. Plan with the rules on the books today.
How to figure your actual gain
Your gain isn't the sale price minus what you paid. It's smaller than that, and the difference can be a lot of money.
Gain = amount realized − adjusted basis
- Amount realized is your sale price minus your selling costs, like commission, the Wisconsin transfer fee, and title charges.
- Adjusted basis is what you paid, plus certain purchase costs, plus the cost of improvements you've made over the years.
Improvements are things that add value, extend the life of the home, or adapt it to new uses: a kitchen remodel, a new roof, an addition, a finished basement, new windows. Routine repairs and maintenance, like painting or fixing a leak, don't count.
A Madison example
Say you and your spouse bought a home on Madison's near west side in 2001 for $350,000. Over 25 years you put in $150,000 of improvements: a kitchen, a roof, windows, and a finished lower level.
- Adjusted basis: $350,000 + $150,000 = $500,000
- You sell for $1,150,000, with about $60,000 in selling costs.
- Amount realized: $1,090,000
- Gain: $1,090,000 − $500,000 = $590,000
- Married filing jointly exclusion: $500,000
- Taxable gain: $90,000
Without the receipts for those improvements, the taxable gain would be $240,000. That's why the first thing I tell long-time owners is to start digging out records now, before you list.
How the taxable part is taxed
Federal
Gain above the exclusion on a home you've owned more than a year is a long-term capital gain. It's taxed at federal long-term rates (0%, 15%, or 20%, depending on your income). Higher-income sellers may also owe the 3.8% net investment income tax on the taxable part of the gain. The excluded portion isn't subject to it.
Wisconsin
Wisconsin taxes capital gains as regular income, but the Wisconsin Department of Revenue allows a deduction for 30% of net capital gain from assets held more than one year. In the example above, Wisconsin would generally tax about 70% of the $90,000.
Wisconsin starts from your federal income, so gain the federal exclusion covers generally isn't taxed by Wisconsin either. Your tax preparer will confirm how it lands on your return.
The Wisconsin detail most sellers don't know about: marital property
If a spouse has passed away, the basis question changes, sometimes dramatically.
When someone dies, inherited property generally gets a stepped-up basis to its value at the date of death. Wisconsin is a marital property state, and under federal tax rules, marital property can qualify for a step-up on both halves of the home at the first spouse's death, not just the half that belonged to the spouse who died.
For a surviving spouse who has owned a Madison home for decades, that can wipe out most or all of the gain. There's also a rule that lets a surviving spouse who hasn't remarried use the full $500,000 exclusion if the home sells within two years of the spouse's death.
How the home was titled, and whether a marital property agreement exists, both matter here. This is exactly the conversation to have with an estate attorney or CPA before you list, not after.
When the exclusion doesn't fully apply
- You haven't lived there two years. If you're moving because of a job change, a health reason, or an unforeseen event, you may qualify for a partial exclusion. A relocation for a new job at UW–Madison, Epic, or out of state is a common reason I see.
- It was a rental for part of the time. Periods when the home wasn't your main residence can reduce the exclusion, and depreciation you claimed while renting it out is taxed separately.
- It's a second home or lake place. A cabin on Lake Kegonsa or a weekend place that isn't your main home doesn't qualify for the exclusion at all.
- You're selling an inherited home. That's a different set of rules, built around stepped-up basis. I wrote about it in selling an inherited home in Madison.
What to do before you list
- Gather improvement records. Contracts, invoices, permits, and credit card statements for anything that added value. The City of Madison's building permit history can help fill gaps.
- Find your original closing statement. It shows your purchase price and some costs that add to basis.
- Get a realistic value. Your gain depends on your actual sale price, not a Zestimate. A pricing conversation with a local agent gives your CPA a real number to work with.
- Talk to your tax preparer early. Especially if you're over the exclusion, recently widowed, or selling a home that was a rental.
If you're weighing a move and want the full picture of what you'll walk away with, I walked through the other costs in the honest math of downsizing in Wisconsin and closing costs for sellers in Madison.
Frequently Asked Questions
How much capital gains can you avoid when selling a house? If you owned and lived in the home as your main residence for at least two of the five years before the sale, you can exclude up to $250,000 of gain, or $500,000 if married filing jointly. You can generally use the exclusion once every two years.
Does Wisconsin tax capital gains on a home sale? Wisconsin taxes capital gains as income, with a 30% deduction for net long-term gains on assets held more than a year. Gain covered by the federal home sale exclusion generally isn't taxed by Wisconsin either.
Do home improvements reduce capital gains tax? Yes. Improvements that add value, extend the home's life, or adapt it to new uses are added to your basis, which lowers your gain. Routine repairs and maintenance don't count, so keep receipts for the bigger projects.
What happens to capital gains when a spouse dies in Wisconsin? Inherited property generally gets a stepped-up basis, and because Wisconsin is a marital property state, both halves of a marital home may qualify. A surviving spouse who hasn't remarried may also use the $500,000 exclusion if the home sells within two years of the death.
Do I pay capital gains if I sell my house before two years? You may owe tax on the gain, but if the move is due to a job change, a health reason, or certain unforeseen events, you may qualify for a partial exclusion. Ask your tax preparer how it applies to your dates.
The bottom line
Most Madison sellers owe nothing on the sale of their home. Long-time owners, recent movers, and surviving spouses are the ones who should run the numbers early, with improvement records in hand and a realistic sale price.
If you're thinking about selling and want to know what your home is likely to sell for, so your CPA can work from a real number, let's talk.
Your Madison Insiders
Thinking about selling? Start with a real number.
A pricing conversation with Cait gives you and your tax preparer the sale price to plan around.
About Cait Berry
Cait Berry is the founder and team lead of Insiders Realty with REAL Broker, LLC, serving buyers and sellers across Dane County. A sixth-generation Madisonian and full-time agent since 2012, she helps relocating families, move-up buyers and sellers, and first-time buyers make confident moves in the Madison market. Cait is also a business coach for real estate agents with Tom Ferry International.
This post is general information about federal and Wisconsin rules on home sale gains, not tax or legal advice. Tax situations vary, so review your specific numbers with a CPA or tax preparer, and with an estate attorney when an estate or a surviving spouse is involved.
