Section 121 Exclusion

Section 121 of the tax code is why most people pay no federal tax when they sell their home. If you owned the property and used it as your main residence for at least 2 of the 5 years before the sale, you can exclude up to $250,000 of the gain as a single filer, or up to $500,000 as a married couple filing jointly. Only the gain above that limit is taxable, at long-term capital gains rates.

The 2-of-5-year ownership and use test does not require the two years to be continuous, and there are reduced (partial) exclusions for a sale forced by a change in workplace, health, or other unforeseen circumstances. The dollar limits were set by the Taxpayer Relief Act of 1997 and have never been adjusted for inflation, so owners of long-held homes in expensive markets increasingly exceed them. Our home sale capital gains calculator applies the exclusion to your numbers.