Definition
The Section 121 exclusion lets homeowners exclude a large amount of capital gain from the sale of a primary residence, up to $250,000 for single filers and $500,000 for married couples filing jointly.
How It Works
To qualify, the taxpayer generally must have owned and used the home as their principal residence for at least two of the five years before the sale. The two years need not be continuous, and the exclusion can be used repeatedly, though generally not more than once every two years.
Example
A married couple sells the home they have lived in for three years with a $450,000 gain and owes no federal capital gains tax on it, since the gain falls within the $500,000 exclusion.
When It Works Best
It works best for homeowners who meet the two-of-five-year test and have gains within the exclusion limits.
Who It Applies To
Owners selling a primary residence.
Watch-Outs
Gain above the exclusion is taxable, periods of renting the home can reduce the excludable amount, and depreciation claimed during any rental period is recaptured and cannot be excluded. Partial exclusions are available for sales driven by qualifying job, health, or unforeseen-circumstance changes.
