Primary Residence Sale Exclusion

§ 121. Exclusion of gain from sale of principal residence(a) ExclusionGross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more. (b) Limitations(1) In generalThe amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000. (2) Special rules for joint returnsIn the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property—(A) $500,000 Limitation for certain joint returnsParagraph (1) shall be applied by substituting “$500,000” for “$250,000” if—(i) either spouse meets the ownership requirements of subsection (a) with respect to such property; (ii) both spouses meet the use requirements of subsection (a) with respect to such property; and (iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3). (B) Other joint returnsIf such spouses do not meet the requirements of subparagraph (A), the limitation under paragraph (1) shall be the sum of the limitations under paragraph (1) to which each spouse would be entitled if such spouses had not been married. For purposes of the preceding sentence, each spouse shall be treated as owning the property during the period that either spouse owned the property. (3) Application to only 1 sale or exchange every 2 yearsSubsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied. (4) Special rule for certain sales by surviving spousesIn the case of a sale or exchange of property by an unmarried individual whose spouse is deceased on the date of such sale, paragraph (1) shall be applied by substituting “$500,000” for “$250,000” if such sale occurs not later than 2 years after the date of death of such spouse and the requirements of paragraph (2)(A) were met immediately before such date of death. (5) Exclusion of gain allocated to nonqualified use(A) In generalSubsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use. (B) Gain allocated to periods of nonqualified useFor purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—(i) the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to (ii) the period such property was owned by the taxpayer.