A taxpayer who meets Section 121 requirements may exclude gain from the sale of a main home. If the exclusion does not apply, the sale is reported on Form 8949 and flows to Schedule D.
A main home is the place the taxpayer lives most of the time. It may be a house, condo, co‑op, mobile home, or houseboat. If only part of the property is used as a main home, the exclusion applies only to that portion.
A home acquired through a like‑kind exchange cannot qualify for the exclusion until it has been held for five years.
Ownership and Use Tests
To claim the exclusion, the taxpayer must meet both tests during the five‑year period ending on the sale date:
- Ownership test — owned the home for at least 2 years
- Use test — used the home as a main home for at least 2 years
- The 24 months do not need to be consecutive
- The 24 months do not need to align with purchase or sale dates
A reduced exclusion may apply if the sale is due to:
- Employment change
- Health reasons
- Unforeseen circumstances
Military, Intelligence, and Peace Corps Suspension
Qualified individuals may suspend the 5‑year period for up to 10 years while on extended duty (more than 90 days or indefinite) at a station at least 50 miles away or while living in government quarters.
Inability to Self‑Care Exception
If a taxpayer becomes physically or mentally unable to care for themselves:
- They meet the use test if they lived in the home for 1 year during the 5‑year period
- Time spent in a licensed care facility counts as time living in the home
- The ownership test still must be met
Death of Spouse Rule
If the home is sold within 2 years of a spouse’s death and the taxpayer has not remarried:
- The surviving spouse may count the deceased spouse’s ownership and use periods as their own
Maximum Exclusion Amounts
Single Filers
Up to $250,000 of gain may be excluded if:
- Ownership test met
- Use test met
- No other home sale exclusion claimed in the prior 2 years
Married Filing Jointly
Up to $500,000 may be excluded if:
- Either spouse meets the ownership test
- Both spouses meet the use test
- Neither spouse claimed an exclusion in the prior 2 years
Periods of Nonqualified Use
A portion of gain may be non‑excludable if the home had nonqualified use after 2008.
Nonqualified use = any period after 12/31/2008 when the property was not used as a main home.
Exceptions (not counted as nonqualified use)
- Time after the taxpayer stops using the home as a main home within the 5‑year window before sale
- Up to 10 years of qualified extended duty (military, Foreign Service, intelligence)
- Up to 2 years of temporary absence due to employment, health, or unforeseen circumstances
Allocation Formula
Only the portion attributable to qualified use may be excluded.
Business or Rental Use of Home
A taxpayer may still qualify for Section 121 even if the home was used for business or rental, but:
- Depreciation allowed or allowable after May 6, 1997 cannot be excluded
- This portion becomes unrecaptured Section 1250 gain (taxed up to 25%)
The remaining gain is split between:
- Nonqualified use gain (taxable at long‑term capital gain rates)
- Excludable gain (Section 121)
Example
A taxpayer:
- Bought a home for $250,000
- Used it as rental, then as main home, then rental again
- Sold it for $450,000
- Claimed $50,000 depreciation
- Had 20% nonqualified use
Step 1 — Adjusted Basis
Step 2 — Total Gain
Step 3 — Depreciation Recapture
50,000 \text{ (taxed at up to 25%)}
Step 4 — Nonqualified Use Gain
Step 5 — Excludable Gain
Final Tax Treatment
- $50,000 → unrecaptured §1250 gain
- $40,000 → long‑term capital gain
- $160,000 → Section 121 exclusion