Learn the key eligibility factors for the $250,000 capital gains exemption when selling your home, including ownership, residency, and filing considerations.
Selling a home can come with a significant tax bill, but the IRS offers a major break for qualifying homeowners. The $250,000 capital gains exemption ($500,000 for married couples) allows many sellers to exclude a portion of their profit from taxes, reducing or even eliminating what they owe.
Not everyone qualifies automatically. Specific conditions must be met regarding ownership, residency, and frequency of use. Understanding these rules helps homeowners plan ahead and maximize tax savings.
To qualify for the $250,000 capital gains exclusion, a homeowner must have owned the property for at least two years within the five years before the sale. These two years do not need to be consecutive, which benefits those who may have rented out the home or moved temporarily.
Ownership is determined by the name on the deed. If a home is co-owned by unmarried individuals or business partners, each person can only claim the exemption on their share of the gain, provided they meet all other requirements. For married couples filing jointly, only one spouse needs to meet the ownership test, which can be helpful if one spouse recently acquired an interest in the home through marriage.
Exceptions apply in cases of divorce or death. If a home is transferred due to divorce, the time the former spouse owned it counts toward the new owner’s requirement. Similarly, if a deceased spouse met the ownership test, the surviving spouse may still qualify for the full $500,000 exclusion if the home is sold within two years of their passing.
Homeowners must have used the property as their primary residence for at least two years within the five years before the sale. These years do not need to be consecutive, allowing flexibility for those who temporarily relocated.
Residency is determined by factors such as voter registration, tax return mailing address, and utility records. Simply owning a home or listing it as a legal address is not enough—the homeowner must have lived there as their main residence. For those with multiple properties, the home where they spend most nights, receive mail, and register their vehicle is typically considered their primary residence.
Special rules apply for those forced to move due to job relocation, health issues, or other unforeseen circumstances. In such cases, a partial exclusion may be available, calculated based on the portion of the two-year period the home was used as a primary residence.
The IRS limits how often homeowners can claim the capital gains exclusion. Sellers can only use this tax break once every two years.
If a homeowner sells a property and excludes the gain, they must wait at least 24 months before claiming the exemption again. Even if they meet all other requirements, selling another home within that two-year window would result in the full capital gain being taxable. This rule applies individually, meaning if two unmarried co-owners each claim their share of the exclusion on a joint sale, neither can use the benefit again for two years, even on separate properties.
If a homeowner sells a residence but does not claim the exclusion—either because there was no taxable gain or they were ineligible at the time—the two-year clock does not reset. The restriction only applies when the exemption has been used.
Tax law provides different capital gains exclusions based on filing status. Single filers can exclude up to $250,000 in gains, while married couples filing jointly may qualify for a $500,000 exemption.
To claim the $500,000 exclusion, both spouses must meet the residency requirement, but only one needs to satisfy the ownership test. This benefits couples where one spouse recently acquired ownership through marriage, as they can still claim the higher exclusion if they meet the use requirement together. However, if only one spouse meets the residency criteria, the couple is limited to the $250,000 exclusion.
Marriage timing can also impact eligibility. If a couple sells a home shortly after getting married and only one spouse previously owned and lived in it, they may not qualify for the full $500,000 exclusion. Conversely, if each spouse sells a separate home after marriage, they can each claim up to $250,000, provided they meet all individual requirements.
The IRS does not require a separate form to claim the capital gains exclusion, but homeowners should keep records in case of an audit. These records should be retained for at least three years after filing the tax return for the year of the sale.
Documents such as settlement statements, deeds, and mortgage records establish ownership. Utility bills, driver’s licenses, and tax returns listing the home’s address help verify residency. Employment records, voter registration, and insurance policies can further support a claim if needed.
If home improvements were made, receipts and contractor invoices should be kept, as they can be used to adjust the cost basis of the property, potentially reducing taxable gains beyond the exclusion amount.
If the gain falls within the allowable limit, the exclusion is applied automatically, meaning no additional forms are required. However, if a portion of the gain is taxable, it must be reported on Schedule D of Form 1040. For those claiming a partial exclusion due to unforeseen circumstances, supporting documentation may be required.