The typical seller in the National Association of Realtors' 2026 Profile of Home Buyers and Sellers, released Nov. 5, had lived in the home for 12 years before selling, the longest median tenure the survey has recorded. Over that span, many owners have built up a gain on paper, and the federal tax rule that decides how much of it is taxable is Section 121 of the tax code, the exclusion for the sale of a main home.

The basic exclusion

Under IRS rules, a seller may exclude up to $250,000 of gain from income on the sale of a main home, or up to $500,000 for a married couple filing jointly. Two tests apply, both measured over the five years ending on the date of sale:

  • Ownership: the seller (or a spouse) owned the home for at least 24 months.
  • Use: the seller lived in it as a main home for at least 24 months.

The ownership and use periods do not have to be the same ones. For the $500,000 joint amount, either spouse can meet the ownership test, but both must meet the use test. The exclusion generally cannot be used if the seller excluded gain on another home sold within the two years before this sale.

How gain is figured

IRS Publication 523, Selling Your Home, sets out the arithmetic. The amount realized is the sale price minus selling expenses, which include agent commissions, advertising, legal fees and loan charges the seller paid that a buyer would normally pay. The adjusted basis starts with what the seller paid for the home, plus certain purchase costs, plus the cost of improvements, minus some adjustments. Gain is the amount realized minus the adjusted basis.

The difference between an improvement and a repair matters to that figure. Improvements add value, extend the home's life or adapt it to a new use, and they raise the basis: an addition, a deck, a new roof, central air conditioning, new siding or a kitchen remodel. Repairs and maintenance, such as painting a room, fixing a leak or replacing broken hardware, do not. Publication 523 notes that a repair can count as an improvement when it is part of a larger remodeling project; one broken window pane is a repair, but replacing every window in a whole-house project is an improvement. Over 12 years, receipts for that work are what document the basis.

When the full exclusion does not apply

A seller who falls short of the two-year tests may still qualify for a partial exclusion if the main reason for the sale was work, health or an unforeseeable event. The IRS counts a new job at least 50 miles farther from the home than the old one, a move to obtain or provide care for an illness, and events such as the home being destroyed or condemned, a death, a divorce or legal separation, or multiple births from one pregnancy. Members of the uniformed services, the Foreign Service and the intelligence community on qualified extended duty may suspend the five-year window for up to 10 years.

A loss on the sale of a main home is not deductible.

Reporting the sale

A sale must be reported on the federal return if the seller receives Form 1099-S from the closing agent, even when the entire gain is excludable, and whenever any part of the gain is taxable. It goes on Form 8949 and Schedule D of Form 1040.

Who sells, and how

The same NAR survey found that 92% of sellers used an agent or broker, an all-time high, and 5% sold on their own, matching the record low. Sellers moved a median 30 miles, 47% bought a newer home and 36% a larger one. The most common reason for selling, cited by 22%, was moving closer to friends and family.

Publication 523 includes worksheets for basis, gain and the exclusion, and the closing statement from the original purchase is where many of the purchase costs that enter the basis appear.

This article reports rules, data and expert guidance. It is not legal, tax, insurance or financial advice. Talk to a licensed pro, your tax advisor or your insurer before you act on it.

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