The short answer
Up to $500,000 of gain tax-free for married couples. The math above that matters.
IRS Section 121 lets homeowners exclude up to $250,000 of gain ($500,000 married joint) from the sale of a primary residence, provided they’ve owned and used it as their main home for at least two of the five years before sale. For long-term homeowners, gains usually exceed the exclusion; the excess is taxed at federal long-term capital gains rates plus state tax.
How Section 121 works
$250K single, $500K married joint. Two-of-five-year ownership AND use test. Generally usable once every two years.
Cost basis reconstruction
The biggest lever. Start with purchase price, add every eligible capital improvement: additions, kitchen/bath remodels, roofs, HVAC, windows, landscaping, finished basements.
When to engage a CPA
If gross gain is close to or above the exclusion, engage a CPA before listing. Strategies like installment sales or charitable trusts need lead time.
Key takeaways
- $250K/$500K exclusion baseline; most long-held sales exceed it.
- Cost basis reconstruction is the biggest lever, often $100K+ reduction possible.
- Capital improvements count; routine maintenance does not.
- Engage CPA before listing, not after closing.
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