The Home Gain Exclusion: Make Sure You Qualify!

May 23rd, 2022

Across the country, many homeowners are cashing out multiples over the list price, especially since one of the most significant tax breaks available to most individuals is the ability to exclude up to $250,000 ($500,000 married) in capital gains on the sale of your residence. Here is what you need to know.


As long as you own and live in your home for two of the five years before selling your home, you qualify for this capital gain tax exclusion. Here are the official hurdles you must jump over to be eligible for this tax break:

  • Main home- Main home is a tax term with a specific definition. Your main home can be a standard home, condo, houseboat, or mobile home. Main home also means the place of primary residence when you own two or more homes.
  • Ownership test. You must own your home for two of the past five years.
  • Residence test. You must live in the home for two of the past five years.
  • Other nuances:
    • You can pass the ownership test and the residence test at different times.
    • You may only use the home gain exclusion once every two years.
    • Depending on circumstances, you and your spouse can count together OR separately.

When to pay attention

You live in your home for a long time. The longer you live in your home, the more likely you will have a significant capital gain. Long-time homeowners should check to see if they have a capital gain before selling their home.

You have old home gain deferrals. Home gains could be rolled into the next home purchased before the current rules. These old deferred gains reduce the cost of your existing home and can result in a capital gains tax.

Two homes into one. Newly married couples with two houses have a potential tax liability as both individuals may pass the required tests on their property but not on their new spouse’s property. Before selling these individual homes, you may wish to create a plan of action that reduces your tax exposure.

Selling a home after divorce. Property transferred due to divorce has not been deemed a sale of your home. However, if the ex-spouse that retains the home later sells the house, it may impact the available amount of gain exemption.

You are helping an older family member. Special rules apply to the elderly who move out of a home and into assisted living and nursing homes. Before selling property, it is best to review options and their related tax implications.

You do not meet the five-year rule. In some cases, you may be eligible for a partial gain exclusion if you are required to move for work, disability, or unforeseen circumstances.

Other situations. There are several other exceptions to the home gain exclusion rules. Some examples include foreclosure, debt forgiveness, inheritance, and partial ownership.

A final thought

The key to obtaining the full benefit of this tax exclusion is to retain good records. Keep all sales records, purchase records, improvement costs, and other documents that support your home’s capital gain calculation. You must be able to prove both the sales price of your home and the associated costs you are using to determine any gain on your property.