Articles · Basics · Individual Income Tax and Form 1040
Section 121: Excluding Gain on the Sale of Your Home
Section 121 lets many homeowners exclude up to $250,000 of gain on selling a main home, or up to $500,000 for many married couples filing jointly.
The two-out-of-five-year tests
The seller must have owned the home and used it as a main home for at least two of the five years before the sale. The two years do not need to be continuous. On a joint return, either spouse can meet the ownership test, but both must meet the use test for the full $500,000.
The exclusion generally cannot be used more than once in two years.
Reduced exclusions
A seller who fails the tests because of a job change, health, or unforeseen circumstances may qualify for a partial exclusion.
What stays taxable
Gain above the limit is taxable. Depreciation claimed after May 6, 1997, for example on a home office or a rental period, generally cannot be excluded. Periods of nonqualified use, such as a former rental converted to a home, can also reduce the exclusion.
If a sale is fully excluded and no Form 1099-S is issued, it often does not need to be reported.
Key takeaways
- The limits are $250,000 and $500,000.
- Own and use the home for two of the past five years.
- Depreciation recapture is not excluded.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.