Selling your home is a big milestone. It often comes with excitement, relief, and hopefully a nice addition to your bank account. But for many homeowners, that excitement quickly turns into anxiety when they start wondering about taxes on selling a house and how much of their proceeds will go to the IRS. The good news is that in many cases, you can keep most or even all of that money tax-free thanks to the 121 home sale exclusion.
You may be wondering:
Not always. If the property is your primary residence and you meet the IRS ownership and use tests, you may be able to exclude up to $250,000 of gain if you are single or $500,000 if you are married filing jointly. This exclusion, also known as Section 121, is designed to make selling your primary home less of a financial burden.
In this post, we will break down how the 121 exclusion works, who qualifies, and what steps you can take to make sure you are not paying more tax than necessary.
The 121 home sale exclusion is an IRS rule that allows homeowners to sell their primary residence and avoid taxes on a significant portion of their profit. If you’re single, you can exclude up to $250,000 of gain; if you’re married filing jointly, you can exclude up to $500,000.
To qualify, you generally need to have owned and lived in the home for at least two of the last five years before the sale. This home sale tax exclusion is one of the most valuable ways to reduce or even eliminate capital gains tax when selling your home.
To qualify for the 121 home sale exclusion, you need to pass two simple tests:
The two years do not have to be consecutive, and the five-year window counts backward from your sale date.
You bought a home in Logan, Utah, in 2019 and lived there for three years. In 2022, you moved to Salt Lake City and rented out your Logan home for two years. If you sold it in 2024, you would still qualify for the exclusion because you owned the home for over five years and lived in it for at least two of those years.
Even if life changes force you to sell earlier, such as a job transfer to Salt Lake City, health reasons, or other unforeseen circumstances, you may still qualify for a partial exclusion.
The IRS allows you to exclude up to $250,000 of gain if you are single or $500,000 if you are married filing jointly. Here’s what that looks like in practice:
Imagine you’re a single homeowner who bought your home for $300,000 and later sold it for $600,000. That’s a $300,000 gain. Thanks to the home sale tax exclusion, you could exclude $250,000 of that gain and only pay capital gains tax on the remaining $50,000.
Now let’s look at a married couple. Suppose you and your spouse bought a home for $400,000 and sold it for $900,000. That’s a $500,000 gain. In this case, you can exclude the entire $500,000, meaning you wouldn’t owe any capital gains tax at all.
These examples demonstrate the significant impact of the home sale tax exclusion on homeowners, enabling many individuals to retain a substantial portion of their hard-earned profits.
While the two out of five year rule applies to most homeowners, there are situations where the rules can change:
The 121 home sale exclusion is a powerful tax break, but small mistakes can lead to paying more than you should. Here are a few common pitfalls and how to avoid them:
You only need to have lived in your home for two years within the last five years before selling, not the two years immediately preceding the sale.
How to avoid it: Keep a clear record of when you lived in the home so you can confidently meet this requirement.
Upgrades like finishing a basement or adding a deck can raise your home’s cost basis and lower your taxable gain. Many homeowners miss this step.
How to avoid it: Save receipts for every improvement and share them with your tax preparer.
You can only use the exclusion once every two years. Selling homes too frequently could mean missing out on the benefit.
How to avoid it: Plan your home sales strategically and wait the full two years before claiming the exclusion again.
If you’ve rented your home, gone through a divorce, or inherited property, the rules can get complicated.
How to avoid it: Work with a tax advisor or CPA to ensure you maximize your exclusion and avoid penalties.
Here are answers to some of the most frequently asked questions homeowners have about capital gains tax and Section 121.
You must have owned and lived in your home for at least two years within the five years before selling. The two years don’t need to be consecutive, and they don’t need to be right before the sale.
Yes. Even if all your gain is excluded, the IRS requires you to report the sale on your tax return. This ensures proper documentation in case of future audits or inquiries.
Possibly. If you sold your home early due to job changes, health reasons, or other unforeseen circumstances, you may qualify for a partial exclusion that reduces your taxable gain.
You can use this exclusion once every two years. If you sell multiple homes in a short time frame, only one sale can qualify for the exclusion in that period.
Selling a home is one of the biggest financial decisions you will ever make, and the right strategy can save you thousands in taxes. At CMP, our Proactive Tax Planning services are designed to help you plan, take full advantage of the 121 exclusion, and keep more of the increase in your home's value.
As a trusted real estate accounting firm in Utah, we work closely with homeowners, real estate professionals, developers, and construction companies to simplify complex tax laws. Our team has extensive experience helping clients across the region navigate property sales, structure transactions, and reduce their tax liability. We have three convenient offices to serve you: Salt Lake City, Logan, and St. George.
From entity planning and buy/sell transaction support to credits, incentives, and cost segregation studies, we offer a full range of tax and accounting solutions.
If you are preparing to sell your home or want to understand your options, our CPAs are here to guide you every step of the way.
Contact us today to schedule a consultation and see how proactive planning can help you keep more of what you earn.