How Often Can I Exclude Gains on Selling a Home from Income Tax?
Many taxpayers are aware that it is possible to exclude gains earned on selling a home from their income tax return. However, a common question is how often and how many times a taxpayer can exclude such gains from their taxes? This article addresses these questions. The tax law that grants taxpayers the right to exclude gains on selling their home in certain circumstances is found in Internal Revenue Code Section 121. It is in this same section that we learn how often a taxpayer can exclude gains on selling their home:
[The exclusion] shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which [the exclusion] applied.
So the basic rule is that you cannot exclude gains on selling a home more often than once every two years. A quick comparison of two scenarios helps illustrate how the rule works:
|Scenario 1||Scenario 2|
|Person A is a single taxpayer who purchased House 1 for $250,000 on January 1, 2009 and lives in the home until December 31, 2012. Person A then purchases House 2 on January 1, 2012 for $300,000 and moves into the home. On January 1, 2014, Person A sells House 1 for $350,000, realizing a gain of $100,000. On January 2, 2016, Person A sells House 2 for $550,000, realizing a gain of $200,000.||Person B is a single taxpayer who purchased House 1 for $250,000 on January 1, 2009 and lives in the home until December 31, 2012. Person B then purchases House 2 on January 1, 2012 for $300,000 and moves into the home. On January 1, 2014, Person B sells House 1 for $350,000, realizing a gain of $100,000. On January 1, 2015, Person B sells House 2 for $550,000, realizing a gain of $200,000.|
You can see that the two scenarios are nearly identical, the only difference being that Person B sells the second house exactly one year after selling the first house, while Person A sells the second house two years and a day after selling the first house. The result? Person A can exclude the full amount of gain realized on selling both House 1 and 2 (i.e. the full $300,000 of gains). Person B, on the other hand, can only exclude the full amount of the gain from selling House 1 (i.e. the $100,000 gain), but cannot exclude any of the gain from selling House 2.
The tax strategy that comes into play here should be obvious — if a taxpayer has previously taken advantage of the home sale gain exclusion rule for the sale of a house sometime within the last two years and the taxpayer is again looking to sell a house for more money than they purchased it for, then the tax consequences of doing so can be quite large if the taxpayer does not wait at least two years after the first home was sold to sell the second.
Rule for Newly Married Joint Filing Taxpayers
For single taxpayers, the maximum gain exclusion generally is $250,000 or $500,000 for married filing jointly taxpayers – but what if two newly married taxpayers file a joint return and one of the taxpayers (but not both) excluded a gain on the sale of a home within the last two years? In such case, the joint filing couple may still exclude gain from a home sale from their gross income, but only up to the $250,000 limit for single taxpayers (rather than the $500,000 gain limit).
Limit on Number of Times Using Home Sale Gain Exclusion?
Another related question often comes up here: how many times total can a taxpayer make use of the home sale gain exclusion over the course of their lifetime? There is no limit at all. The taxpayer can qualify for the exclusion as many times as the taxpayer can manage to during a lifetime.
- I.R.C. § 121(b)(3).↵