Understanding the capital gains tax on home sales

Congratulations! You sold your house at a nice profit.

But will the tax man take a big chunk of it? It often depends on the capital gains tax exclusion Opens in a New Window.‍ ‍ ^{See note 1}

The IRS allows you to earn a substantial profit on the sale of your main home without having to pay taxes on it. Single filers can generally exclude up to $250,000 of home-sale gains from taxes, and those married and filing jointly can generally exclude as much as $500,000 under special rules.

To qualify for the maximum exclusions, the following must be true (though the first two don't have to occur at the same time):

1. You meet the ownership test.

You must own the property for at least two years — not necessarily continuous — during the five-year period ending on the date of the sale. (If you’re married and filing jointly, only one spouse has to meet the ownership test.)

2. You meet the use test.

You must live in the home as your main residence for at least two years — not necessarily continuous — during the five-year period ending on the date of the sale. (If you’re married and filing jointly, both spouses must meet the use test.)

3. You haven't excluded a gain recently.

During the two-year period ending on the date of the sale, you (and your spouse) didn't exclude a gain from the sale of another home.

These are the basic requirements, but several variables could impact if or how you can claim the exclusion.

For example, members of the military may be able to suspend the five-year period for ownership and use in certain situations. And taxpayers who don't fully meet the ownership and use tests still may be able to exclude a smaller amount of gain. And if you rented out the house, the rules get more complicated.

The number of potential nuances to the tax implications of home sales can be overwhelming, and you might still be confused even after paging through “Selling Your Home,” IRS Publication 523 Opens in a New Window.‍ ‍ ^{See note 1} That's why it's wise to get professional tax help or use tax preparation software.