Capital Gains on Home Sale: How to Pay $0 Tax (Section 121)
You bought a house for $300k. You sold it for $600k. That’s a $300k profit. Usually, the IRS would demand a huge cut. But thanks to “Section 121,” you can likely keep every single penny. Here are the rules.
Single Limit
$250k
Tax Free ProfitRule
Married Limit
$500k
Tax Free ProfitRule
Time Test
2 Years
Must Live ThereCheck
“Profit” isn’t just Selling Price
Before you panic about taxes, you need to calculate your actual profit. The IRS lets you deduct the cost of improvements.
| Item | Amount | Math |
|---|---|---|
| Selling Price | $600,000 | (+) |
| Purchase Price | $300,000 | (-) |
| Renovations* | $50,000 | (-) |
| Net Profit | $250,000 | = |
*Renovations Count!
Did you add a new roof ($20k)? Remodel the kitchen ($30k)?
These are “Capital Improvements.” They increase your “Cost Basis,” which lowers your taxable profit. Keep those receipts!
Tax Bill Scenario
| Result | Tax Owed |
|---|---|
| If Exempt | $0 |
| If Not Exempt | ~$37,500 (15%) |
Do You Qualify? The Checklist
The IRS has a strict “Use Test.” You can’t just flip houses every month and use this rule.
- 1. Ownership: You must have owned the home for at least 2 years.
- 2. Residence: You must have lived there for at least 2 years total (730 days) out of the last 5 years. (The 2 years don’t have to be consecutive).
- 3. Frequency: You can only use this exclusion once every 2 years.
Pro Tip: The “Partial Exclusion”
What if you lived there for only 1 year but had to move?
The Escape Hatch
If you moved due to Health, Job Change (over 50 miles), or Unforeseen Circumstances (e.g., divorce, disaster), you can get a partial exclusion.
Example: Lived there 1 year (50% of 2 years)? You get 50% of the limit ($125k Single / $250k Married).
Example: Lived there 1 year (50% of 2 years)? You get 50% of the limit ($125k Single / $250k Married).
Frequently Asked Questions
Do I report this on my tax return?
Usually No. If your profit is fully covered by the exclusion ($0 tax due), you typically do NOT even need to report the sale to the IRS. It’s that good.
What if I converted it to a rental?
Careful. If you lived there for 2 years, then rented it out for 3 years, you still qualify (because you met the “2 out of 5” rule). But if you rent it out for 4 years, you lose the exemption completely.