The $500,000 home-sale exclusion has not moved since 1997
Section 121 shields $250,000 of gain per seller, $500,000 per couple, unchanged since 1997. FHFA's index is up 268% since January 1998.
- What happened
- Section 121 of the tax code lets a seller exclude up to $250,000 of gain on a main home, or $500,000 on a joint return, if the owner lived in it for 24 months of the 5 years before the sale. The amounts were set by the Taxpayer Relief Act of 1997 and the statute contains no inflation adjustment. FHFA's national house price index stood at 444.61 in August 2026 (released October 27, 2026) against 120.93 in January 1998.
- Why
- Gain is the amount realised (price less selling costs) minus adjusted basis (purchase price plus improvements). The exclusion comes off that gain; whatever is left is a long-term capital gain taxed at 0%, 15% or 20% depending on taxable income, with a 3.8% net investment income tax above $200,000 or $250,000 of modified adjusted gross income.
- The numbers that matter
- $250,000Maximum exclusion per seller, $500,000 on a joint return (26 USC 121(b), unchanged since 1997)24 monthsOwnership and residence required within the 5 years before the sale (IRS Publication 523, 2025 edition)268%Rise in FHFA's purchase-only house price index, January 1998 to August 2026 (released Oct 27, 2026)$635,000Gain on the illustrative 1998 purchase worked below: $385,000 taxable for a single seller, $135,000 for a couple
- Why it matters
- On the worked example a single seller owes up to $73,550 of federal tax and a married couple $21,580, on the same house, because the exclusion is per person and the gain stacks on other income.
- What happens nextas we saw it on 29 Oct 2026
- FHFA is scheduled to publish its quarterly index, with monthly data through September 2026, on November 24, 2026. The 2026 capital gains thresholds were set in Revenue Procedure 2025-32 on October 9, 2025.
At FHFA's index-implied value the gain already clears the single exclusion; at the $950,000 worked price it clears the joint one too.
| Gain at the $950,000 worked sale price | 635 |
|---|---|
| Gain at FHFA index-implied value ($735,318) | 420.3 |
| Exclusion, married filing jointly | 500 |
| Exclusion, single seller | 250 |
A couple who bought a house in January 1998 and sold it in August 2026 at the pace of the national index would have seen its price multiply 3.68 times. The exclusion that shields the gain on a main home from federal income tax has multiplied zero times over the same period. It was $250,000 per seller, $500,000 on a joint return, when the Taxpayer Relief Act of 1997 wrote it, and section 121 of the tax code still says $250,000 and $500,000, with no line adjusting either figure for inflation.
The rules: two years in five, once every two years
Publication 523 (2025 edition) states the ownership test as owning the home “for at least 24 months (2 years) out of the last 5 years leading up to the date of sale”. The residence test is separate: “All that is required is a total of 24 months (730 days) of residence during the 5-year period”, and it “doesn't have to be a single block of time.” Tax Topic 701 (page updated October 12, 2026) adds that the two periods can differ.
Section 121(b)(1) of the Internal Revenue Code caps the excluded gain at $250,000. Section 121(b)(2)(A) substitutes $500,000 on a joint return if “either spouse meets the ownership requirements”, “both spouses meet the use requirements”, and neither spouse is barred by the once-in-two-years rule. A spouse who moved in 18 months before the sale therefore costs the household $250,000 of exclusion.
Publication 523: “You may take the exclusion only once during a 2-year period.” For a widow or widower, section 121(b)(4) keeps the $500,000 figure if the sale occurs “not later than 2 years after the date of death of such spouse” and the joint-return conditions were met immediately before the death; Publication 523 adds that the survivor must not have remarried.
Section 121(c) scales the limit by the fraction that the period of ownership and use “bears to 2 years”. Publication 523's qualifying reasons include a new work location “at least 50 miles farther from the home”, a move because “a doctor recommended a change in residence”, and unforeseeable events such as death, divorce, eligibility for unemployment compensation or “two or more children from the same pregnancy”. Twelve months of residence gives 0.5 × $250,000 = $125,000 per seller. The fraction applies to the limit, not the gain.
Gain is not price minus price
Publication 523 lays the computation out as a subtraction in two steps. Selling price minus selling expenses gives the amount realised. Amount realised minus adjusted basis gives the gain or loss: “A positive number indicates a gain; a negative number indicates a loss.” Both middle lines move the answer by tens of thousands of dollars on a long-held house.
Publication 523's list of improvements that add to basis includes additions (a bedroom, bathroom, deck, garage, porch or patio), landscaping, a driveway, a fence, a pool, central air conditioning, a furnace, wiring, a new roof, new siding, a septic system, a water heater, kitchen modernisation and flooring. Routine repairs do not count: “painting (interior or exterior), fixing leaks, filling holes or cracks, or replacing broken hardware.” Fire and casualty insurance premiums and mortgage points are excluded from basis.
Publication 523 describes selling expenses as “the costs directly associated with selling your home”: sales commissions, advertising fees, legal fees and other costs of selling. Loan charges count only when they “would normally have been the buyer's responsibility” and the seller paid them.
Section 121(d)(6) removes from the exclusion any gain up to the depreciation adjustments “attributable to periods after May 6, 1997”. Publication 523: “Section 121 requires you to recognize depreciation claimed on a home after May 6, 1997.” In its worked example, $9,000 of depreciation claimed on a stable becomes $9,000 of unrecaptured section 1250 gain, which Tax Topic 409 (page updated September 24, 2026) says “is taxed at a maximum 25% rate.” A home office with $12,000 of depreciation claimed produces $12,000 of taxable gain even when the rest of the sale is excluded: up to $3,000 of tax.
If the seller receives Form 1099-S from the closing agent, Tax Topic 701 says “you must report the sale of the home even if the gain from the sale is excludable.” The reporting goes on Form 8949 and Schedule D; the 2025 Form 8949 instructions assign code H to a main-home sale and say to “enter the amount of excluded (nontaxable) gain as a negative number (in parentheses) in column (g).”
Why the limit now matters: 29 years of house prices
FHFA's House Price Index report with data through August 2026, released October 27, 2026, says U.S. house prices “rose nationwide in August, up 0.3 percent from the previous month”, and 2.4% from August 2025. Its table of the seasonally adjusted, nominal purchase-only index (January 1991 = 100) gives 444.61 for August 2026, 278.50 for January 2020, 188.94 for January 2010, 136.89 for January 2000 and 120.93 for January 1998. The index tracks repeat sales of houses with conforming mortgages and is not adjusted for inflation.
444.61 ÷ 120.93 = 3.6766, a rise of 268%. $200,000 × 3.6766 = $735,318. Starting in June 1998 instead (index 123.99) the multiple is 3.5859 and the value $717,171.
Take the $735,318 index-implied value, subtract $55,000 of selling costs and a $260,000 basis ($200,000 purchase plus $60,000 of improvements): the gain is $420,318. That is $170,318 above a single seller's $250,000 but $79,682 inside a couple's $500,000. The exclusion is a fixed dollar amount applied to a nominal gain, and nominal gains compound.
The worked sale: bought 1998 for $200,000, sold for $950,000
The house below is illustrative and deliberately above the index path. The reader can change any input.
Selling price $950,000 minus selling expenses $55,000 (commission, legal and closing costs paid by the seller) = amount realised $895,000.
Adjusted basis: purchase price $200,000 plus improvements $60,000 (a new roof, a kitchen modernisation, a deck) = $260,000.
Gain: $895,000 − $260,000 = $635,000. Without the improvements and selling costs the figure would have been $750,000; those two lines removed $115,000 of gain.
Single seller who meets both tests: $635,000 − $250,000 = $385,000.
Married couple filing jointly, both of whom lived in the house for 24 of the last 60 months: $635,000 − $500,000 = $135,000.
The remainder is a long-term capital gain, reported on Form 8949 with code H and the exclusion in column (g), then carried to Schedule D.
What that remainder costs depends on other income, because long-term gains sit on top of ordinary income when the 0%, 15% and 20% bands are measured, as the capital gains piece explains. For 2026, Revenue Procedure 2025-32 (announced October 9, 2025) puts the top of the 0% band at $98,900 of taxable income for joint filers and $49,450 for single filers, and the top of the 15% band at $613,700 and $545,500; the standard deductions are $32,200 and $16,100. The net investment income tax is 3.8% of the lesser of net investment income or the excess of modified adjusted gross income over $250,000 (joint) or $200,000 (single), thresholds the IRS says “are not indexed for inflation”. The IRS Q&A states that gain excluded under section 121 is not subject to the tax; its own example taxes a couple with a $600,000 gain and a $500,000 exclusion on the $100,000 above it.
| Household | Other income | Taxable gain | At 0% | At 15% | At 20% | Capital gains tax | NIIT (3.8%) | Total |
|---|---|---|---|---|---|---|---|---|
| Married, other income $40,000 | $40,000 | $135,000 | $91,100 | $43,900 | $0 | $6,585 | $0 | $6,585 |
| Married, other income $150,000 | $150,000 | $135,000 | $0 | $135,000 | $0 | $20,250 | $1,330 | $21,580 |
| Single, other income $100,000 | $100,000 | $385,000 | $0 | $385,000 | $0 | $57,750 | $10,830 | $68,580 |
| Single, other income $200,000 | $200,000 | $385,000 | $0 | $361,600 | $23,400 | $58,920 | $14,630 | $73,550 |
Single: taxable income $200,000 + $385,000 − $16,100 = $568,900. The gain runs from $183,900 to $568,900, crossing the $545,500 ceiling: $361,600 at 15% = $54,240 and $23,400 at 20% = $4,680, together $58,920. MAGI $585,000 exceeds $200,000 by $385,000, equal to the net investment income, so NIIT is 3.8% × $385,000 = $14,630. Total $73,550, 11.6% of the gain.
Married: taxable income $150,000 + $135,000 − $32,200 = $252,800; the ordinary part, $117,800, is above the $98,900 zero-rate ceiling, so all $135,000 is taxed at 15% = $20,250. MAGI $285,000 exceeds $250,000 by $35,000, less than the $135,000 of net investment income, so NIIT is 3.8% × $35,000 = $1,330. Total $21,580, 3.4% of the gain. With $40,000 of other income instead, $91,100 of the gain fits in the 0% band and the bill is $6,585.
What it means for your money
The arithmetic rewards records. Every receipt for a roof, a kitchen or a fence is a dollar off the gain; on the example a $60,000 file of improvements was worth $9,000 at 15% and $11,280 once the 3.8% is included.
- The tests cover the five years before the sale, not the whole holding period. The 24 months of residence must sit inside the final 60.
- Two qualifying sellers are worth $250,000 more than one. The surviving-spouse window is two years from the date of death.
- Income in the year of sale sets the rate. A couple with $40,000 of other income owed $6,585 on the $135,000 remainder; a couple with $150,000 owed $21,580.
- A loss is a loss. The Form 8949 instructions say a loss on the sale of personal property is not deductible.
The FHFA piece works the real return on a house, the affordability arithmetic covers the buyer's side, and the tax-loss harvesting piece covers capital losses on securities, which net against a taxable home-sale gain in the same year.
Sources
- Publication 523 (2025), Selling Your HomeInternal Revenue Service · Oct 27, 2026 · Primary source
- Topic No. 701, Sale of Your Home (page updated October 12, 2026)Internal Revenue Service · Oct 27, 2026 · Primary source
- Topic No. 409, Capital Gains and Losses (page updated September 24, 2026)Internal Revenue Service · Oct 27, 2026 · Primary source
- Instructions for Form 8949 (2025), columns (f) and (g), code HInternal Revenue Service · Oct 27, 2026 · Primary source
- Questions and Answers on the Net Investment Income Tax (page updated September 14, 2026)Internal Revenue Service · Oct 27, 2026 · Primary source
- Revenue Procedure 2025-32, sections 4.03 and 4.14 (2026 inflation-adjusted items)Internal Revenue Service · Oct 27, 2026 · Primary source
- IR-2025-103, IRS releases tax inflation adjustments for tax year 2026 (October 9, 2025)Internal Revenue Service · Oct 27, 2026 · Primary source
- 26 U.S.C. 121, Exclusion of gain from sale of principal residence (United States Code, 2023 edition)Office of the Law Revision Counsel via govinfo.gov · Oct 27, 2026 · Primary source
- FHFA House Price Index (HPI) Monthly Report, data through August 2026, released October 27, 2026U.S. Federal Housing Finance Agency · Oct 27, 2026 · Primary source
- House Price Index (HPI) data page and release calendarU.S. Federal Housing Finance Agency · Oct 27, 2026 · Primary source
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