What Are Capital Gains?
When you sell property, land, or investments for more than you originally paid, the profit you make is called a capital gain. Capital gains are “realized” when the asset is sold and that profit is subject to capital gains tax.
For families planning for long-term care or Medicaid eligibility, it’s important to understand how these taxes work before selling property. A sale might seem like a quick way to free up funds, but it can also trigger unexpected taxes that reduce what’s available for care.
Long-Term vs. Short-Term Capital Gains
Capital gains are taxed differently depending on how long you’ve owned the asset:
- Long-Term Capital Gains: Apply if you’ve owned the property for more than one year before selling. These usually have lower tax rates.
- Short-Term Capital Gains: Apply if you’ve owned the asset for one year or less. These are typically taxed at your ordinary income rate, which can be significantly higher.
There are some exceptions to these rules, such as property acquired through a gift, inheritance (decedent property), or certain patent property.
2025 Capital Gains Tax Rates
According to the IRS, your capital gains tax rate depends on your taxable income and filing status:
- 0% rate applies if your taxable income is:
- ≤ $47,025 for single or married filing separately
- ≤ $94,050 for married filing jointly or qualifying surviving spouse
- ≤ $63,000 for head of household
- 15% rate applies if your taxable income is:
- $47,026–$518,900 for single
- $47,026–$291,850 for married filing separately
- $94,051–$583,750 for married filing jointly or surviving spouse
- $63,001–$551,350 for head of household
- 20% rate applies to income above those thresholds.
| Tax rate | Individual filing | Married filing jointly | Married filing separately | Head of household |
| 0% | 2024: $0 to $47,025 2025: $0 to $48,350 | 2024: $0 to $94,050 2025: $0 to $96,700 | 2024: $0 to $47,025 2025: $0 to $48,350 | 2024: $0 to $63,000 2025: $0 to $64,750 |
| 15% | 2024: $47,026 to $518,900 2025: $48,351 to $533,400 | 2024: $94,051 to $583,750 2025: $96,701 to $600,050 | 2024: $47,026 to $291,850 2025: $48,351 to $300,000 | 2024: $63,001 to $551,350 2025: $64,751 to $566,700 |
| 20% | 2024: $518,901 or more 2025: $533,401 or more | 2024: $583,751 or more 2025: $600,051 or more | 2024: $291,851 or more 2025: $300,001 or more | 2024: $551,351 or more 2025: $566,701 or more |
How Capital Gains Affect Seniors and Families
Many families decide to sell a home or other property to help cover the cost of long-term care, thinking it’s the simplest solution. But when you sell, you may trigger capital gains tax and that can quickly eat into the funds you hoped to use for care or Medicaid planning.
Home Sale Exclusions
The IRS does allow certain exclusions when you sell your primary residence. If you meet the eligibility requirements, you can exclude up to:
- $250,000 of gain from your income if you file single, or
- $500,000 if you’re married filing jointly.
That means only the profit above those thresholds would be taxed as a capital gain. However, these exclusions only apply if you meet both the ownership and residence tests.
Eligibility Requirements
- Ownership Test: You must have owned the home for at least 24 months during the 5 years leading up to the sale.
- Residence Test: You must have lived in the home as your primary residence for at least 24 months during that same 5-year period.
Failing either test may reduce or eliminate your ability to claim the exclusion and that can result in a higher taxable gain.
Exceptions to the Rules
The IRS recognizes certain life situations that may affect your eligibility. Each of these circumstances comes with its own set of special rules and limitations, which can make the process far more complicated than most families expect. That’s why it’s so important to speak with an experienced elder law attorney before making any decisions about selling property or reporting a home sale. The right legal guidance can help you navigate IRS exclusions, avoid unnecessary taxes, and ensure your choices don’t unintentionally interfere with your Medicaid or long-term care planning.
Why This Matters for Long-Term Care Planning
Even when you qualify for the home-sale exclusion, the remaining gain still increases your income for the year. For older adults trying to qualify for Medicaid, that spike in income can temporarily push you over the Medicaid eligibility limit, delaying or preventing coverage for nursing home or in-home care.
The Common Misconception About “Selling to Qualify for Medicaid”
One of the most common misunderstandings we see is the belief that selling property or other assets will help you qualify for Medicaid faster. Families often assume that converting a home, land, or investments into cash will make it easier to “spend down” to meet Medicaid’s strict asset limits. Unfortunately, this approach can actually backfire and delay your ability to receive the care you need.
The Capital Gains Trap: When Decades of Homeownership Turn Into a Tax Bill
For many Kentucky families, the family home has been in the picture for decades, bought long ago, paid off, and cherished. But when it comes time to sell that home to pay for long-term care or to qualify for Medicaid, the IRS may see it very differently.
Here’s why: capital gains tax is based on the difference between what you paid for the home (the “basis”) and what you sell it for today. So even though your home value may have simply kept up with the market, the IRS treats that appreciation as income.
Example: The Long-Term Homeowner’s Dilemma
Let’s say you bought your home in 1950 for $100,000 and sell it in 2025 for $450,000.
That’s a $350,000 gain.
Even if you qualify for the home-sale exclusion ($250,000 if single, $500,000 if married filing jointly), you could still owe taxes on the remaining $100,000 of profit. Depending on your income and tax bracket, that could mean tens of thousands of dollars in federal capital gains taxes, plus any state taxes owed.
For seniors, this is often a shocking and painful surprise, especially when that sale was meant to fund nursing home care, assisted living, or in-home care.
Why This Matters for Medicaid Planning
The money you receive from selling your home isn’t just taxable, it’s also counted as an available asset for Medicaid. That means the same sale that creates a tax bill could also push you over Medicaid’s asset limit, delaying eligibility for benefits until the funds are “spent down.”
The Tax Impact of Selling Property
When you sell a home, land, or investment property, the IRS considers the profit to be capital gain income. That gain must be reported on your tax return, and depending on your income level, it can be taxed anywhere from 0% to 20%, or even higher for certain assets like real estate or collectibles.
So instead of solving a financial problem, the sale can actually create two new ones, a tax liability and a temporary disqualification from benefits.
How the Medicaid Five-Year Lookback Works
Medicaid’s five-year lookback rule reviews all financial activity within the five years prior to your application. If you’ve sold, transferred, or gifted assets during that time, Medicaid may view those transactions as attempts to reduce your wealth to qualify for benefits faster.
Even if the sale was legitimate, the proceeds from that sale are still part of your available resources until they’re either spent down on qualified expenses or protected through legal planning tools, like a Medicaid Asset Protection Trust (MAPT).
Why This Combination Can Be So Costly
Here’s where timing becomes critical:
- Selling triggers a taxable event (capital gains).
- The sale resets the Medicaid lookback clock if done within five years of applying.
- The proceeds increase countable assets, delaying or disqualifying eligibility.
That’s the “perfect storm” many families don’t see coming. What started as an effort to help a loved one pay for care can result in paying thousands in unnecessary taxes, losing months or even years of Medicaid coverage, and draining family savings that could have been protected.
Final Thoughts: Plan Before You Sell
Selling property to help pay for long-term care often comes from a place of love and responsibility, but without the right guidance, it can lead to unnecessary taxes, penalties, and stress. The truth is, what seems like a “quick fix” can actually cost families thousands in capital gains tax, reset the Medicaid five-year lookback period, and delay access to care.
Proactive planning makes all the difference. By creating a long-term care strategy before a crisis hits, you can protect your home, preserve your savings, and ensure that you or your loved one receives quality care when it’s needed most.
Why Elder Law Guidance Can Assist You
At Elder Law Guidance, we help Kentucky families navigate the complex intersection of Medicaid eligibility, tax law, and asset protection. Our firm has guided countless families through decisions about selling or protecting property, setting up trusts, and planning for long-term care – all with one goal in mind: to protect what you’ve worked hard to build.
Our experienced legal team understand both the legal and emotional weight of these choices. Whether you’re trying to plan ahead or facing a sudden care need, we’ll walk you through every step, so you can make informed decisions that safeguard your family’s future.
📞 Schedule a consultation today to discuss your options before making any major financial moves.
Want to Go Deeper? Join Our Upcoming Webinar
If this topic hit close to home, you’re not alone.
Join us for our free live webinar: Capital Gains and Inheritance: What to Know
🗓 Date: Thursday, October 23, 2025
⏰ Time: 5:30 p.m. ET
🎙 Presenter: Kentucky Elder Law Attorney Scott Collins
In this session, we’ll break down:
✔️ How capital gains tax really works when selling inherited or long-held property
✔️ The connection between capital gains and Medicaid’s asset rules
✔️ Proven strategies to protect your home, reduce taxes, and preserve your family’s legacy
Don’t wait until a crisis forces quick decisions. Learn how proper planning today can save thousands tomorrow.
👉 Reserve your free spot now and gain the clarity you need to make confident choices about your home, assets, and long-term care plan.
