As a homeowner, you might have concerns about paying capital gains tax when you decide to sell your home.
Luckily, there's a tax provision known as the "Section 121 Exclusion" that can help you save on taxes following a home sale.
In simple terms, this capital gains tax exclusion enables homeowners who meet specific requirements to exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of capital gains from the sale of their primary residence.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
That means if you sell your home for a gain of less than $250,000 (or $500,000 if married, filing jointly), you won't be obligated to pay capital gains tax on that amount.
However, there are certain criteria you must meet to qualify for the home sale exclusion. There are also several exceptions to the 121 exclusion rules.
Here is more of what you need to know to help determine whether you qualify.
Related: More Home Sellers Face Capital Gains Tax Bills
Avoiding capital gains tax: 121 home sale exclusion requirements
Primary residence: You must have owned and used the home as your primary residence for at least two of the five years leading up to the date of the sale.
The IRS allows you to have only one primary residence at a time, and the agency uses various factors to determine whether a home qualifies as a primary residence.
Notably, however, the two years don't have to be a consecutive, single block of time during the five years.
Frequency: You can only claim this exclusion once every two years. If you have already excluded gains from a previous home sale within the last two years, you'll need to wait before you can claim it again.
Eligible gains: The exclusion applies only to gains from your home's sale, not losses. Additionally, any portion of the profit exceeding the $250,000/$500,000 limit will be subject to capital gains tax.
Note: It's important to keep detailed records of your home sale, including the purchase price, any improvements made to the property, and expenses. These records will help you accurately calculate your capital gains and determine if you qualify for the exclusion.
Exceeding the limit: If your profit exceeds the exclusion limit, you will need to pay capital gains tax on the amount that surpasses the limit. For example, if you are single and your profit is $300,000, $50,000 of that profit ($300,000 to $250,000) would be subject to capital gains tax.
In that case, the tax rate you pay on the excess profit depends on your income and whether the gain is short-term or long-term. Generally, long-term capital gains tax rates are lower than ordinary income tax rates.
Exceptions to the capital gains home sale exclusion
There are several exceptions to IRS home sale exclusion rules.
For example, if you transfer a home to a spouse or ex-spouse, the IRS doesn’t consider that to be a gain or a loss.
- Other exceptions to the rules apply in situations involving U.S. military service members or when the primary home sale is a factor in separation, divorce or death of a spouse.
- Situations involving vacant land, destroyed homes, like/kind exchanges, or business or rental income generally trigger different tax rules, requirements and tax treatment.
For more information on these and other situations, see IRS Publication 523.
What about a partial home gain exclusion?
If you don't meet the maximum home sale exclusion eligibility, you might still qualify for a partial exclusion of gain.
For example, according to the IRS, you can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event.
For more information on how partial home exclusions are calculated, you can find resources on IRS.gov or consult with a qualified and trusted financial adviser.
Reporting a home sale on your taxes
Typically, you'll receive Form 1099-S from the closing agent, which details the home sale.
This form is used to report proceeds from real estate transactions, and the IRS says you must include the information when filing your return, even if you have no taxable gain.
Always keep detailed records of your purchase price, improvements and selling expenses to support your claims for exclusions or deductions.
Remember that certain factors, such as any depreciation claimed for the home, can affect capital gains tax. It's also important to consider any state or local taxes that could apply to the sale of your home.
Consulting with a tax professional is a good idea if you need clarification on your eligibility or help navigating the complexities of tax laws. They can provide personalized advice based on your situation and ensure you take full advantage of any available tax benefits.
Is capital gains tax on home sales going away?
There's been some recent chatter from President Trump and on Capitol Hill about a new proposal to eliminate capital gains taxes on primary home sales.
The bill from Rep. Marjorie Taylor Greene (R-Ga.) would end taxes on home sale profits altogether, with some exceptions.
Though at this time, the idea, for which Trump has indicated support, is still just a proposal. It's unclear how Congress will receive it.
For more information, see: No Capital Gains Tax on Home Sales Coming Soon?
What about state-level capital gains taxes on home sales?
While the federal capital gains tax home sale exclusion is uniform across the U.S., state-level taxation can vary. Some states, such as California, follow the federal rule, while others have their own regulations.
Check with your state's tax authority or a qualified tax professional to understand your obligations.
Related
-
Four Spa Retreats for Well-Heeled RetireesWe hand-picked these U.S. spa retreats for their serenity, amenities and dedication to the comfort of older travelers. All are located in the Continental U.S.
-
Four Military Benefits That Have Helped My FamilyMilitary life can be challenging for servicemembers and their families, but they're offered some significant financial benefits to help cushion the blow.
-
The Original Property Tax Hack: Avoiding The ‘Window Tax’Property Taxes Here’s how homeowners can challenge their home assessment and potentially reduce their property taxes — with a little lesson from history.
-
Social Security Tax Limit Rises Again: Who Pays More in 2026?Payroll Taxes The Social Security Administration has announced significant changes affecting millions as we approach a new year.
-
Three Critical Tax Changes Could Boost Your Paycheck in 2026Tax Tips The IRS predicts these tax breaks may change take-home pay in 2026. Will you get over $1,000 in tax savings?
-
The Rubber Duck Rule of Retirement Tax PlanningRetirement Taxes How can you identify gaps and hidden assumptions in your tax plan for retirement? The solution may be stranger than you think.
-
RMDs, Roth, and SS: Test Your Knowledge of Retirement Tax RulesQuiz Don't let the IRS catch you off guard. Take our quiz to reveal common retirement tax rules that could save (or cost) you thousands.
-
IRS Updates 2026 Tax Deduction for People Age 65 and OlderTax Changes Adjustments to the extra standard deduction can impact the tax bills of millions of older adults. Here are some new amounts to know for 2026.
-
IRS Reveals New 2026 Child Tax Credit and other Family Credit AmountsTax Credits Key family tax breaks are higher for 2026, including the Earned Income Tax Credit and the Adoption Credit. Here's what they're worth.
-
Standard Deduction 2026 Amounts Are HereTax Breaks What is the standard deduction for your filing status in 2026?
