Ask the Editor, November 21: Home Sale Tax Break

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she's looking at five questions on the gain exclusion tax break when you sell your home. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Will my home sale be taxed?

Question: My husband and I are thinking of selling our home next year that we have owned for many years. Will the gain be taxed?

Joy Taylor: It depends. Generally, if you have owned and lived in your main home for at least two out of the five years before the sale date, up to $250,000 ($500,000 for joint filers) of your gain when you sell the home is tax-free. Any gain above the $250,000/$500,000 exclusion amounts is taxed at long-term capital gains rates of 0%, 15% or 20%, depending on the amount of your taxable income. Losses from sales of primary homes are not deductible.

Here are a couple of examples to illustrate the rule. Say you bought your home in 1995, have a tax basis of $250,000, and are selling the home for $650,000. The entire $400,000 gain is tax-free since you are filing a joint return. Let's now take the same example, but instead of selling the home for $650,000, you sell it for $900,000. Since you are married and, provided you file a joint return, the first $500,000 of the gain is tax-free, and the remaining $150,000 is taxed at long-term capital gains rates.

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2. What if I change jobs and sell my home early?

Question: I am married, and I bought my home 14 months ago. My company is relocating, and I must move out of state for work. I plan to sell the home next month. Can I exclude any gain from the home sale?

Joy Taylor: In your case, you don't meet the two-out-of-five-year ownership and use periods to qualify for the full $500,000 gain exclusion for joint filers. However, you are not out of luck. Some people who sell a home early may still be eligible for a portion of the exclusion, depending on the circumstances.

For example, early sales due to job changes, illness or unforeseen circumstances qualify for the partial exclusion. The percentage of the $250,000 or $500,000 gain exclusion that can be taken is equal to the portion of the two-year period that you used the home as a residence. You can use days or months for this calculation.

For example, say you bought your home for $740,000 in September 2024 and you sell it for $790,000 in December 2025 because of your out-of-state job move. The maximum gain exclusion in this instance is $312,500 ($500,000 x (15/24)). So, your $50,000 gain would be fully excluded from income and would be tax-free.

3. What if my unmarried partner and I jointly own a home?

Question: My partner and I own our primary residence together and have lived here for 10 years. We plan to sell it next year. We aren't married and file our taxes separately as single filers.

When we sell the home, can each of us claim a $250,000 gain exclusion? And since there is lots of appreciation in the home since we bought it, are we allowed to split the remaining taxable gain so that we each pay capital gains tax on half of the amount?

Joy Taylor: Since your partner and you would have each owned and used the home as your primary residence for at least two out of the five years before the sale date, then each of you would qualify for the $250,000 home-sale exclusion. Any excess capital gain would be split between you. Each of you on your single-filed tax returns would report your share of the selling price and tax basis in your home to arrive at gain.

Here is a simple example. Say you sell your home for $1.5 million next year, and you have a total tax basis in the home of $200,000. Each of you would calculate your separate gain based on 50% of these figures. On your single-filed tax return, you would calculate gain before the home-sale exclusion of $650,000 ($750,000 sale price - $100,000 tax basis). Your taxable gain is $400,000 ($650,000 total gain - $250,000 home-sale exclusion). You would then report the $400,000 long-term capital gain on your Form 1040. You would use IRS Form 8949 to calculate the taxable gain and transfer the amount to Schedule D of your Form 1040. Your partner would do the same thing on his or her single-filed tax return.

4. Will Congress make all home-sale gains tax-free?

Question: Someone told me there is a congressional proposal in the House to make all gain on home sales tax-free. Is this true, and if so, do you think it will pass?

Joy Taylor: Some Republican lawmakers advocate making the full gain on home sales tax-free. House Representative Marjorie Taylor Greene (R-Ga) has introduced a bill, the "No Tax on Home Sales Act," to end the tax on sales of primary homes, saying her proposal would lead to increased housing supply. And President Trump has chimed in, saying he would be open to ending the tax on home sales.

This idea might sound wonderful, but I don't think it will come to fruition. The proposal would be very expensive and would mainly benefit upper-income individuals.

A more feasible option is a one-time increase in the current $250,000/$500,000 gain-exclusion amounts. Another potential alternative is to annually index the gain-exclusion amounts to inflation. The $250,000 and $500,000 figures have never been adjusted for the appreciation in residential real estate during the 28 years this popular tax break has been in effect. Both alternatives would require congressional action.

5. What is my gain exclusion if I sell my house after my husband dies?

Question: My husband and I jointly owned our home together for many years. He died last year, and I plan to sell my home in 2026. How much of my gain will be nontaxable?

Joy Taylor: If you sell the home in 2026, your home-sale exclusion would be $500,000. A spouse who sells the family home within two years after the death of the other spouse gets the full $500,000 exclusion that is generally available only to joint filers, provided the two-out-of-five-year use and ownership tests were met before death.

There is also a welcome added tax benefit since you owned the home jointly with your spouse. If you don't live in a community property state, half the home will get a step-up in tax basis upon the death of the first-to-die spouse. The rule is more generous if the house is held as community property. The entire tax basis is stepped up to fair market value when the first spouse dies.

Here's an example. Let's say you and your husband bought your home for $150,000 many years ago in a non-community property state, and it was worth $980,000 when your husband died in 2024. Your tax basis in the home jumps to $565,000 (your half of the original $150,000 cost basis plus half of your husband’s $980,000 date-of-death value). Twenty months later, you sell the home for $1,085,000. Of the $520,000 gain from the home sale ($1,085,000 - $565,000), $500,000 is tax-free and $20,000 is taxed at long-term capital gains rates.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, IRAs and more. We will continue to answer these in future Ask the Editor round-ups. So keep those questions coming!

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