Home sale exclusion
By Jude Wallis
The home sale exclusion keeps a capped amount of gain from the sale of a main home out of taxable income, provided ownership and use tests are met.
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The exclusion applies to gain, not to the sale price. Gain is what the sale nets after selling costs, less the adjusted basis: the purchase price plus qualifying improvements. Owners who read the cap against the price they sold for usually conclude they owe tax when they do not.
Two tests gate it. The property must have been owned for a qualifying period and lived in as a main home for a qualifying period within the years before the sale, and the exclusion can only be claimed again after a waiting period. A joint return has a larger cap than a single one.
Gain above the cap is taxed as a capital gain, at long-term rates for a home held long enough. The home sale exclusion calculator splits gain into excluded and taxable, and how investments are taxed is the wider treatment of capital gains tax.