Section 121 excludes up to $250,000 of gain on the sale of your primary home, $500,000 for a married couple filing jointly, when you have owned and used the home as your principal residence for at least 2 of the 5 years before the sale. It can be used repeatedly, but not more than once every two years, and years the home spent as a rental can carve out a taxable slice.
The Hendersons bought for $320,000, raised two kids, and sold twelve years later for $780,000. Gain: $460,000. Tax on it: zero, because they are married, they lived there, and the code wrote them a $500,000 thank-you note for doing so. No intermediary, no election, no structure. The simplest big play in this library.
The rules in plain English
- Own the home and use it as your principal residence for at least 2 of the last 5 years. The two years need not be consecutive.
- The exclusion runs once every two years, no exceptions for impatience.
- Married couples get the full $500,000 when both spouses meet the use test and neither used the exclusion in the prior two years.
- Depreciation claimed on the home, from a rental period or a home office using the actual method, is not excluded. It comes back at sale, a known and usually small cost your CPA nets against years of deductions.
Years of rental use can carve out a taxable, nonqualified slice. The exclusion runs once every two years, no exceptions for impatience. And depreciation claimed on the home comes back at sale. The exclusion is real; the residence timeline is the price.
Questions owners actually ask
The house you live in gets the code's kindest page. The buildings that pay you rent get its most profitable one: most owners sit on $200,000 to $450,000 per million in unclaimed deductions. If you own the walls that earn, send in the engineers.
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