Q: How much home sale profit is tax-free?

Under Section 121, you can exclude up to $250,000 of gain on your primary residence sale ($500,000 if married filing jointly). To qualify, you must have owned and lived in the home for at least 2 of the 5 years before the sale.

Question 1

How much home sale profit is tax-free?

Accepted Answer

Under Section 121, you can exclude up to $250,000 of gain from the sale of your primary residence. Your exclusion of $120,000 shelters all of your gain from taxation.

You meet both the ownership test (5 years owned >= 2) and use test (5 years lived >= 2) required for the full Section 121 exclusion.

Question 2

What are the ownership and use tests?

Accepted Answer

You must meet both tests: (1) Ownership test — you owned the home for at least 2 years during the 5-year period before the sale, and (2) Use test — you lived in the home as your primary residence for at least 2 years during the same period. The years don't need to be consecutive.

Question 3

How is the gain on a home sale calculated?

Accepted Answer

Your gain equals the sale price minus your cost basis (purchase price + improvements) minus selling costs (agent commissions, closing costs). Improvements that add value to the home (renovations, additions) increase your basis and reduce your taxable gain.

Question 4

What happens if my gain exceeds the exclusion?

Accepted Answer

Any gain above the $250,000/$500,000 exclusion is taxed as long-term capital gains (if you owned the home for more than a year) at 0%, 15%, or 20% depending on your income. The 3.8% NIIT may also apply if your income exceeds the threshold.

Step	Amount
Sale Price	$500,000
Cost Basis	-$350,000
Selling Costs	-$30,000
Total Gain	$120,000
Section 121 Exclusion	-$120,000
Taxable Gain	$0
LTCG Tax	-$0
NIIT	-$0
Net Proceeds	$470,000

Home Sale Exclusion Calculator (2025)

Sale Proceeds Journey

Related Calculators