Personal Finance & Estate › Income, gift, estate & real-estate taxes › Capital gains tax (short- vs. long-term)
Home-sale exclusion ($250k / $500k, Sec. 121)
Since 1997· Tax rule
Law or rule (2026)Set by statute, regulation or the agency; numbers change yearly.
Sell your main home and exclude up to $250,000 of gain from tax, or $500,000 for a married couple.
See it on the Personal Finance & Estate map →How it works
You must have owned and lived in the home as your main residence for two of the five years before the sale, and can use the exclusion once every two years. A surviving spouse keeps the $500,000 limit if selling within two years of the death. Gain from depreciation after May 1997 (home office, past rental) is still taxed. Rental periods after 2008 before moving in shrink the exclusion. A home acquired through a 1031 must be owned five years first.
Why it matters for you
It is the biggest tax break most families get, but the limits haven't changed since 1997, so long-held California homes often exceed them.
Rules, limits and sources (2026)
IRC Sec. 121, from the Taxpayer Relief Act of 1997; IRS Publication 523 explains the tests; California follows the federal exclusion.
Watch out for
Bills to raise the caps or end tax on home sales were introduced in 2025, with President Trump expressing interest; none has passed.
Connections (2)
▸Home-sale exclusion ($250k / $500k, Sec. 121) exempts home profits from Capital gains tax (short- vs. long-term)Law or rule (2026)
How they connect
A home sale is a capital transaction, so its gain would normally be taxed. Section 121 removes up to $250,000 ($500,000 joint) of that gain, and the excluded amount also escapes NIIT. Gain above the cap is taxed as capital gain, and post-1997 depreciation at up to 25%. Losses on a home aren't deductible.
When it applies
The 1997 Taxpayer Relief Act replaced the old rollover rule and the one-time $125,000 exclusion for sellers 55 and older.
The rule
IRC Sec. 121 and IRS Publication 523; sales are reported on Form 8949 when gain exceeds the exclusion or a Form 1099-S is issued.
Watch out for
Because the caps aren't indexed, more long-time owners exceed them each year; whether Congress will raise them is open.
▸Home-sale exclusion ($250k / $500k, Sec. 121) can combine with 1031 like-kind exchangeDepends on you
How they connect
A property used both as a home and a rental can use both rules. Example: live in it two years, rent it out, then sell within three years of moving out; Section 121 excludes up to $500,000 joint and a 1031 defers the rest. The reverse order has a trap: a home acquired by 1031 must be held five years.
When it applies
IRS Revenue Procedure 2005-14 explained combining them; the five-year rule came from a 2004 law.
How sure?
Rev. Proc. 2005-14 with IRC Secs. 121(d)(10) and 1031; its worked examples show the math.
Watch out for
Nonqualified-use rules and depreciation recapture make the math tricky, and results depend heavily on dates and facts. Ask your CPA.