The home sale exclusion and its ownership and use test

How it works

A seller can exclude up to this year's official home sale exclusion single (not yet verified here; see the official source below) of gain, or this year's official home sale exclusion married (not yet verified here; see the official source below) on a joint return where both spouses meet the use test and either meets the ownership test. The two years of ownership and use do not have to be continuous or the same two years, and short absences count as use. The exclusion can be used once every two years. A seller who fails the full two years because of a job move, a health reason, or an event the IRS lists can take a partial exclusion in proportion to the time met. Gain is the sale price minus selling costs minus basis, where basis is the purchase price plus improvements. Depreciation claimed for a home office or a rental period is taxed separately and not excluded. Gain above the exclusion is a long term capital gain.

What it gives

Most home sales produce no tax at all because the gain stays under the exclusion.

The exclusion renews every two years, so it can be used on more than one home over a lifetime.

A forced move for work or health still earns a partial exclusion.

What it costs, or where the catch is

A home used as a rental for years before the sale can lose part of the exclusion and owes tax on depreciation taken.

Gain above the exclusion is taxed, and in high cost areas long held homes can pass it.

Records of improvements are needed to raise the basis, and many sellers never kept them.

A worked example

Gwen and Hollis bought a home for $260,000, spent $40,000 on a new kitchen and roof, and sold it eleven years later for $610,000 with $36,000 of selling costs. Their gain is $610,000 minus $36,000 minus $300,000, which is $274,000. On a joint return that sits under the married exclusion, so they owe nothing on the sale. Had Gwen been single, the gain above the single exclusion would be taxed as a long term gain.

Where it goes wrong

The common miss is throwing away receipts for improvements, which leaves the basis low and the gain higher than it needs to be when the exclusion is not enough.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Publication 523, Selling Your Home. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.