Gain on Sale of Personal Residence

The real estate market has been white hot since 2020. Chances are if you sold your personal residence in the last few years you sold it for much more than you originally paid. So, is that gain taxable? It depends. 

Under Section 121 the IRS allows taxpayers to exclude $250,000 of a gain, or up to $500,000 if filing a joint return if they meet the ownership and use test. To qualify, the taxpayer must have owned and used the home as their personal residence for at least 2 out of the last 5 years. The IRS also allows for partial gain exclusions should a taxpayer sell their home before meeting the 2 year test if due to certain other unforeseen circumstances. 

If a taxpayer fails to meet the exclusion tests, then the gain is taxable as a capital gain in year of sale. Short-term if held 1 year or less. Long-term if held more than 1 year but less than 2.