If you’ve owned your home for decades, there’s a good chance it’s worth far more today than what you paid for it — and that profit can trigger a real tax bill when you sell. The good news: the IRS Section 121 home sale exclusion lets most homeowners keep up to $250,000 (or $500,000 for married couples) of that gain completely tax-free. Here are 7 things to know before you list your home.

1. What Is the Section 121 Home Sale Exclusion?

Section 121 of the tax code lets homeowners exclude a portion of the capital gain from selling their primary residence — up to $250,000 if you’re single, or up to $500,000 if you’re married and filing jointly. That gain is simply the difference between what you sell the home for and what you originally paid for it (adjusted for certain costs, more on that below).

This exclusion matters more today than it did a generation ago. Home values in many parts of the country have climbed sharply since the 1980s and 1990s, when a lot of long-time homeowners first bought. A house purchased for $80,000 decades ago that now sells for $500,000 or more can produce a large paper “profit” — and without this exclusion, a good chunk of that could be taxable.

2. Do You Qualify? The Ownership and Use Tests

To claim the full exclusion, you generally need to pass two tests:

• Ownership test: You owned the home for at least 2 of the last 5 years before the sale
• Use test: You lived in the home as your main home for at least 2 of the last 5 years before the sale

The two years don’t need to be consecutive, and both spouses don’t need to meet the use test to qualify for the $500,000 joint exclusion — though both generally need to meet the ownership test. You also can’t have used this exclusion on the sale of another home within the two years before the current sale.

If you don’t fully meet these tests because of a job change, health reasons, or another unforeseen circumstance, you may still qualify for a partial exclusion based on how much of the 2-year period you did meet.

3. How to Calculate Your Taxable Gain

The basic formula is straightforward:

Sale price − selling costs − adjusted basis = capital gain

Your adjusted basis is what you originally paid for the home, plus the cost of qualifying improvements over the years (a new roof, a kitchen remodel, an addition) — not routine repairs or maintenance.

For example, say a couple bought their home in 1990 for $90,000 and has spent $60,000 on improvements since. Their adjusted basis is $150,000. If they sell today for $600,000 and pay $36,000 in selling costs, their gain is $600,000 − $36,000 − $150,000 = $414,000. Since that’s under the $500,000 joint exclusion, the entire gain would be tax-free.

This is exactly why keeping receipts and records of home improvements matters: every qualifying dollar you can add to your basis is a dollar of gain that isn’t exposed to tax if you do end up over the exclusion limit.

4. What Happens If Your Gain Exceeds the Exclusion?

Any gain above the $250,000/$500,000 threshold is taxed as a long-term capital gain, assuming you owned the home for more than a year, at your applicable capital gains tax rate.

It’s worth noting that these dollar thresholds have not been adjusted for inflation since they were set in 1997. Home prices in many markets have grown substantially since then, which means more long-time homeowners — especially those in high-appreciation areas — are bumping into the cap than lawmakers may have originally intended. There has been ongoing discussion in Congress about raising or indexing these limits, but as of this writing no such change has been enacted. Check IRS.gov for the current, official thresholds before you file.

5. Special Situations for This Age Group

A few scenarios come up often for homeowners in their 50s, 60s, and 70s:

• Surviving spouse: If your spouse passed away, you can still claim the full $500,000 exclusion (instead of just $250,000) if you sell within 2 years of their death and otherwise meet the ownership and use tests.
• Moving to assisted living: If you become physically or mentally unable to care for yourself, the IRS allows you to count time in a licensed care facility toward the use test, as long as you owned and lived in the home for at least 1 year out of the 5 before the sale.
• Former rental or vacation home: If you later moved into a property you once rented out, special “non-qualified use” rules can reduce the portion of gain eligible for the exclusion. This one is easy to get wrong, so it’s worth double-checking with a tax professional.

6. How to Report the Sale on Your Tax Return

If your entire gain is covered by the exclusion and you didn’t receive a Form 1099-S reporting the sale, you generally don’t need to report the sale on your tax return at all.

If you did receive a Form 1099-S, or if your gain exceeds the exclusion amount, you’ll need to report the sale on Form 8949 and carry it over to Schedule D of your Form 1040. Only the portion of the gain above your allowed exclusion is taxable.

7. FAQ

Does the exclusion apply to a mobile home or co-op?
Yes. As long as the property was your main home and you meet the ownership and use tests, mobile homes, condos, co-ops, and even houseboats used as a primary residence can qualify.

What if I sell while owning two homes?
The exclusion only applies to the sale of your main home — generally the one where you actually live most of the time. A second home or vacation property doesn’t qualify unless it was converted into your main home and you meet the ownership and use tests there.

Can I use this exclusion more than once in a lifetime?
Yes, there’s no lifetime limit. You can use the Section 121 exclusion every time you sell a home, as long as you meet the ownership and use tests and haven’t claimed it on another home sale within the prior 2 years.

This article is for general informational purposes and is not tax, legal, or financial advice. Exclusion amounts and rules can change with future IRS guidance or legislation. For guidance specific to your situation, consult IRS.gov or a licensed tax professional.