GLOSSARY — REAL ESTATE TERMS
Capital Gains Exclusion (Section 121)
The Section 121 exclusion allows a home seller to exclude up to $250,000 ($500,000 for married couples filing jointly) of capital gains from the sale of a primary residence, provided ownership and use requirements are met.
The ownership and use test
To qualify, a seller generally must have owned and used the home as their primary residence for at least 2 of the 5 years before the sale. Meeting this test allows up to $250,000 in gains to be excluded for a single filer, or $500,000 for a married couple filing jointly.
What counts as gain
The taxable gain is calculated based on the sale price minus the adjusted cost basis, which includes the original purchase price plus qualifying capital improvements -- not routine maintenance. This is part of why keeping records of major renovations matters well beyond the sale itself.
WHAT TO TRACK BEFORE SELLING YOUR PRIMARY RESIDENCE
- Confirm you meet the 2-of-5-year ownership and use test
- Gather records of qualifying capital improvements to establish your cost basis
- Calculate your estimated gain against the $250K/$500K exclusion limits
- Talk to a tax professional if you're unsure whether you fully qualify
Can I use this exclusion more than once?
Generally yes, but not more than once every 2 years, since the ownership and use test resets each time.
What if I don't meet the full 2-year requirement?
Partial exclusions may apply in certain circumstances -- job relocation, health reasons, or other unforeseen circumstances -- worth reviewing with a tax professional rather than assuming you don't qualify.
Does this exclusion apply to investment properties?
No -- Section 121 applies specifically to a primary residence. Investment properties are more commonly addressed through a 1031 exchange instead.