The $250,000 / $500,000 home-sale exclusion, explained

Section 121 of the tax code lets you sell your main home and keep up to $250,000 of the gain tax-free if you're single, or $500,000 if married filing jointly — if you pass two tests: you owned the home, and you lived in it as your main home, for at least 2 of the 5 years before the sale. Most long-time homeowners owe $0 federal tax on the sale. (Source: IRS Topic No. 701.)

The two tests

• Ownership test: you owned the home for at least 2 years during the 5 years before the sale.
• Use test: you lived in it as your main home for at least 2 years during the same 5-year window.

The two years don't have to be continuous, and they don't have to be the same two years. For married filing jointly, the $500,000 figure requires a joint return, at least one spouse meeting the ownership test, and both meeting the use test (IRS Topic No. 701).

Basis: the number your gain is measured from

Your gain is not "sale price minus what you paid." It is the amount realized (sale price minus selling costs) minus your basis — generally your purchase price, plus most purchase closing costs, plus the cost of major improvements: a roof, an addition, a finished basement, new HVAC. Routine repairs and maintenance do not add to basis (IRS Publication 523 has the full lists). Every improvement dollar you can document is a dollar of gain you'll never be taxed on — keep the receipts.

Fine print that catches people

• Once every two years. If you used the exclusion on another sale within the last 2 years, you generally can't use it again yet.
• Partial exclusions exist. Sell before meeting the tests because of a job change, health reasons, or certain unforeseen circumstances, and you may still exclude a pro-rated share (IRS Publication 523).
• Rentals and second homes are different. The exclusion is for your main home. Time as a rental can reduce it under the "nonqualified use" rules, and depreciation you claimed usually comes back as taxable recapture.
• State tax is separate. Most states tax the gain too, each under its own rules — the checker on this site is federal only.
• Above the exclusion, long-term rates apply — 0%, 15%, or 20% depending on your income, with a possible extra 3.8% net investment income tax at higher incomes.

Sources: IRS Topic No. 701 — Selling Your Home and IRS Publication 523 — Selling Your Home. This page is a plain-English summary, not tax advice — your situation can differ, and a tax professional should confirm it before you sell.

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