Capital Gains on a Home Sale (2026): The Exclusion That Shrank
$250,000 of gain is excluded, $500,000 filing jointly, if you owned and lived in the home two of the last five years. Those amounts have not moved since 1997, so they have lost 52% of their value, and sales that used to be entirely untaxed now are not.
The exclusion is generous enough that most home sales are tax-free, which is why so little is written about the cases where it is not. Those cases are growing, for one reason: the threshold is a fixed number in a statute written in 1997, and house prices are not.
Working out the gain
The gain is not the difference between what you paid and what you sold for. Selling costs come off the proceeds, and improvements go on your basis:
| Sale price | $900,000 | |
| Selling costs | -$54,000 | Agent commission, legal fees, transfer taxes |
| Amount realized | $846,000 | Calculated |
| Purchase price | -$300,000 | What you paid |
| Capital improvements | -$50,000 | A new roof or kitchen, not repairs |
| Gain | $496,000 | Calculated |
The price rose $600,000, and the gain is $496,000. Keeping receipts for improvements is worth real money: the $50,000 of work in this example removes $50,000 of gain, which for the single filer below is $9,400 of tax. Repairs do not count, only improvements that add value or extend the life of the home.
What the exclusion leaves
| On a $496,000 gain | Excluded | Taxable | Federal tax |
|---|---|---|---|
| Married filing jointly | $500,000 | $0 | $0 |
| Single | $250,000 | $246,000 | $43,208 |
| No exclusion (a rental or second home) | None | $496,000 | $90,588 |
Long-term rates for 2026, with the gain stacked on $180,000 of other household income for the joint rows and $120,000 for the single one, including the 3.8% net investment income tax where it applies. Excludes state tax.
The same house, sold by a couple, is tax-free; sold by one person, it costs $43,208. The exclusion is per return, not per person, and that is the single biggest reason two otherwise identical sales come out differently. Two unmarried co-owners are a separate case: each claims their own $250,000 on their share, provided each meets the ownership and use tests.
The threshold has lost 52% of its value
Congress set $250,000 and $500,000 in the Taxpayer Relief Act of 1997 and attached no indexing. Tax brackets, the standard deduction and retirement limits all rise with inflation each year. This does not.
The fixed $250,000 deflated by the CPI-U, US city average, all items, from the Bureau of Labor Statistics. 2026 is the average of the months published so far. Indexed from 1997, the exclusion would now be about $516,667 single and $1,033,333 jointly.
In 1997 money the exclusion is now worth $120,968. Had it been indexed like everything else in the code, it would be $516,667 and $1,033,333. That erosion is the whole story of why a tax once aimed at expensive homes now reaches ordinary ones in expensive markets, and why the gap widens every year it stays fixed.
The rules that decide it
- Two of five years. You must have owned the home two years and lived in it as your main home two years, within the five years ending at the sale. The periods need not be continuous or the same two years, and short absences such as a vacation still count as use.
- Once every two years. You cannot claim the exclusion if you claimed it on another home sold within the previous two years.
- A partial exclusion if you leave early. A move for work, for health, or for certain unforeseeable events gives a prorated exclusion. Twelve months in the home is worth half the full amount.
- Depreciation always comes back. Depreciation claimed after 6 May 1997 on a home office or a rental period cannot be excluded, and is taxed at up to 25%. On $80,000 of past depreciation that is $20,000, due even if the remaining gain is covered.
- Non-qualified use. Time after 2008 when the home was not your principal residence, a rental stretch for instance, reduces the excludable share in proportion. Time after you move out and before you sell is not counted against you.
Reporting it
If the whole gain is excluded and you received no Form 1099-S, there is usually nothing to report. If you did receive a 1099-S, or part of the gain is taxable, it goes on Form 8949 and Schedule D. Taxable gain above the exclusion is a long-term capital gain, taxed at the long-term rates, and it raises your AGI, which can pull other thresholds with it. Run a figure through the capital gains calculator.
Most states tax the gain as ordinary income with no equivalent exclusion of their own, so a sale that is federally tax-free is not always tax-free at home. Our state tax comparison has the rates.
Frequently asked questions
How much capital gains tax do I pay when I sell my house?
Often none. You can exclude up to $250,000 of gain as a single filer and $500,000 filing jointly, if you owned and lived in the home for at least two of the five years before the sale. Only gain above that is taxed, at long-term capital gains rates.
What is the 2-out-of-5-year rule?
To claim the exclusion you must have owned the home for at least two years, and lived in it as your main home for at least two years, within the five years ending on the sale date. The two years need not be continuous, and the ownership and use periods need not be the same two years. You also cannot have used the exclusion on another home sold in the previous two years.
How is the gain on a home calculated?
Sale price, less selling costs, less your basis. Basis is what you paid plus capital improvements. On the $900,000 sale on this page, $54,000 of selling costs and a $350,000 basis leave a $496,000 gain, not the $600,000 the price difference suggests.
Has the home sale exclusion ever been increased?
No. The $250,000 and $500,000 figures were set by the Taxpayer Relief Act of 1997 and are not indexed for inflation. Indexed from 1997 to now they would be about $516,667 and $1,033,333.
Do I pay the 3.8% net investment income tax on a home sale?
Only on the gain that the exclusion does not cover, and only if your modified AGI for the year passes $200,000 single or $250,000 jointly. Excluded gain does not count as investment income and does not count toward the threshold.
What if I rented the home out?
Depreciation you claimed after 6 May 1997 cannot be excluded: it is taxed at up to 25% as unrecaptured section 1250 gain, even when the rest of the gain is fully excluded. Periods of non-qualified use after 2008 also reduce the share of gain you can exclude.
Can a widow or widower still claim $500,000?
Yes, if the home is sold within two years of the spouse's death and the couple met the use test at that time. After two years the exclusion drops to the single amount. The surviving spouse usually also gets a stepped-up basis on the deceased spouse's share, which often matters more.
What if I sell before two years?
You may still get part of the exclusion if the move was for a change in workplace, for health, or for certain unforeseeable events. The reduced exclusion is prorated by the months you qualified, so a year in the home is worth half the full amount, not nothing.
Related guides
The tables show 0%, 15% and 20%. The 3.8% surtax starts at $200,000 while the 20% rate waits until $545,500, so the widest band in between is really 18.8%.
Federal tax and FICA leave $79,180 of a $100,000 salary wherever you live. Nine states take nothing after that, and Oregon takes $8,176.
$16,100 single and $32,200 jointly. With the state and local tax cap now $40,400 rather than $10,000, state taxes alone can clear the bar for the first time since 2018.
Bracket tables are indexed by taxable income and most people read them against salary. The gap is at least the standard deduction, which is enough to put you a full row lower than you think.
Researching and writing about Canadian personal finance since 2026.
Last reviewed October 2026 · How we research
“Capital Gains on a Home Sale (2026): The Exclusion That Shrank.” Vault Nerd, https://www.vaultnerd.com/learn/capital-gains-on-home-sale, updated October 2026.
- IRS Publication 523, Selling Your Home: the ownership and use tests, partial exclusions, non-qualified use and depreciation
- Internal Revenue Code section 121, as enacted by the Taxpayer Relief Act of 1997
- Bureau of Labor Statistics, CPI-U US city average all items (CUUR0000SA0), annual averages 1997 to 2026
- IRS Revenue Procedure 2025-32: 2026 long-term capital gains brackets
- Internal Revenue Code section 1411: net investment income tax
No product is reviewed on this page and Vault Nerd has no affiliate relationship in this category. Figures checked October 2026.