When you sell your primary residence, the IRS gives you a major federal tax break under Internal Revenue Code §121. Here’s what homeowners should know before listing their property.
The Capital Gains Exclusion
- Single homeowners can exclude up to $250,000 in profit from federal taxes.
- Married couples filing jointly can exclude up to $500,000.
This exclusion applies only if the home was your primary residence.
Ownership and Use Test
To qualify, you must have:
- Owned the home for at least 2 years, and
- Lived in it as your main residence for at least 2 years within the last 5 years before the closing on the sale.
The two years don’t need to be consecutive.
How Often Can You Use It?
You can only claim this tax break once every two years.
Exceptions and Partial Exclusion
If you had to sell because of:
- A new job,
- Health reasons, or
- Other unforeseen circumstances,
…you may qualify for a partial exclusion, even if you haven’t met the full two-year requirement.
Special Situations
- Couples: Only one spouse needs to meet the ownership test, but both must meet the use test.
- Divorce: Time your spouse owned the home may count toward your requirement.
- Widows/Widowers: If you sell within 2 years of a spouse’s death, you may still claim the $500,000 exclusion.
- Business or Rental Use: Any depreciation claimed must be recaptured and taxed.
Do You Need to Report the Sale?
- If your profit is below the exclusion limit, you typically don’t need to report the sale.
- If above, report it on Form 8949 and Schedule D of your tax return.
✅ Bottom line: For most homeowners, selling a primary residence means you won’t owe federal tax on a large portion — or even all — of your profit. Always check with a tax professional for your specific situation.
