Home Sale Exclusion

Section 121 of the Internal Revenue Code allows a taxpayer to exclude up to $250,000 of gain ($500,000 for married filing jointly) from the sale of a principal residence, provided ownership and use tests are met. The mechanics look simple on the surface, but the exclusion has real edges: partial exclusions, periods of nonqualified use, home office recapture, and prior depreciation deductions all create taxable gain that surprises sellers who assumed the exclusion covered everything. This article covers how the exclusion works, how the rules have changed since 1997, common misconceptions, and the court cases that define where the IRS draws the line.