Key Takeaways
- The home sale gain exclusion is $250,000 (single) or $500,000 (married filing jointly) - set in 1997 and never inflation-indexed since.
- To qualify, you need to pass both the ownership test and the use test: owning and living in the home as your main residence for at least 2 of the 5 years before the sale.
- You can only use this exclusion once every 2 years - it's designed for homeowners, not house flippers.
- Gain above your exclusion is taxed as a capital gain (0%, 15%, or 20%, plus the 3.8% NIIT for higher earners) - not as ordinary income.
- Three bills are currently in Congress to raise or eliminate this cap, plus a separate push to have Treasury index capital gains for inflation by regulation - none has passed as of mid-2026.
If you sell your main home in 2026, you can still exclude up to $250,000 of gain from your taxable income if you’re single, or $500,000 if you’re married filing jointly. That number hasn’t changed since the Taxpayer Relief Act of 1997 — nearly thirty years, no inflation adjustment, ever.
I get questions about this exclusion every time a reader is getting ready to sell, so here’s how it actually works, what trips people up, and where things stand in Washington on finally updating it.
How the Home Sale Exclusion Actually Works
When you sell your main home, your gain is the sale price minus your adjusted cost basis (what you paid, plus qualifying improvements and selling costs). If that gain is under your exclusion limit, you generally owe nothing on it — and per IRS Topic 701, you don’t even need to report the sale on your tax return.
To qualify for the full exclusion, you need to pass two tests over the 5-year period ending on the sale date:
The ownership test. You owned the home for at least 2 years (roughly 24 months) during that 5-year window. The 2 years don’t need to be consecutive.
The use test. You lived in the home as your primary residence for at least 2 years during the same 5-year window — also not required to be consecutive.
You can only claim this exclusion once every 2 years. That rule exists specifically to prevent people from flipping primary residences to dodge capital gains tax.
Partial Exclusion — What If You Don’t Meet the 2-Year Rule?
If you sold before hitting the 2-year mark, you may still qualify for a partial exclusion if the sale was due to a change in workplace location, health reasons, or another IRS-recognized unforeseen circumstance (divorce, death, multiple births from a single pregnancy, and similar events all qualify).
The partial exclusion is calculated proportionally — based on the fraction of the 2-year requirement you actually met. If you lived in the home for 12 months instead of 24 before a qualifying job relocation, you’d generally get about half of the full exclusion ($125,000 single / $250,000 married).
You’ll need documentation if the IRS ever asks — job offer letters, medical records, or similar proof tied to the specific exception you’re claiming.
Calculating Your Adjusted Cost Basis
Your cost basis isn’t just your purchase price. It includes:
- The original purchase price
- Closing costs and legal fees from the purchase
- Capital improvements (a new roof, a finished basement, a kitchen remodel) — not routine repairs or maintenance
- Selling costs (agent commissions, title fees, escrow fees)
Every capital improvement you can document raises your basis and shrinks your taxable gain. Keeping receipts for renovations is the single highest-leverage thing you can do here — it’s the one lever fully within your control, regardless of what Congress does with the exclusion cap.
Example — Priya and Alex, married, bought a home in 2006 for $310,000. Over 18 years they spent $65,000 on a kitchen remodel, a new roof, and a finished basement, plus $9,000 in original closing costs. Their adjusted cost basis is $384,000. They sell in 2026 for $825,000, minus $48,000 in selling costs, for a net sale price of $777,000. Their gain is $393,000 — fully covered by the $500,000 married exclusion. They owe nothing on the sale and don’t need to report it.
Inherited Homes: The Stepped-Up Basis
If you inherit a home rather than buying it, your cost basis usually isn’t what the original owner paid — it “steps up” to the home’s fair market value on the date of death. This is separate from the sale exclusion above, but it matters just as much.
Example — David inherits his mother’s home, originally purchased in 1985 for $95,000. Its fair market value at her death in 2026 is $520,000. David’s basis is $520,000, not $95,000. If he sells shortly after for $530,000, his taxable gain is only $10,000 — even though the home appreciated by well over $400,000 during his mother’s lifetime.
Multiple Homes and Rental Conversions
The exclusion only applies to your main home — the one you live in most of the time. If you own a second home or a rental property, gain on that sale is fully taxable at standard capital gains rates, with no exclusion available.
If you’ve converted a former rental into your primary residence (or vice versa), the math gets more complicated — a portion of the gain tied to the rental period may not qualify for the exclusion, and any depreciation you claimed while it was a rental gets recaptured and taxed separately. That’s a case where it’s worth talking to a tax professional before you list the property.
Where Things Stand in Congress
Here’s the part that’s actually moving. The $250,000/$500,000 caps were fixed by the Taxpayer Relief Act of 1997 and have never been adjusted for inflation — while the median home price has roughly tripled since then, to around $415,000 as of late 2025.
Three bills are currently sitting in the House Ways and Means Committee:
The No Tax on Home Sales Act, introduced by Rep. Marjorie Taylor Greene in July 2025, would eliminate the exclusion cap entirely for a primary residence — no $250K or $500K limit, full stop.
The Middle Class Home Tax Elimination Act, introduced by Rep. Scott Fitzgerald in January 2026, pursues the same full-elimination goal with messaging aimed at middle-class sellers.
The More Homes on the Market Act, a bipartisan bill, takes a different approach — doubling the caps to roughly $500,000 (single) and $1,000,000 (married) and indexing them to inflation going forward, so they don’t freeze again. Of the three, this is the one tax-policy watchers consider most likely to actually move, since a full repeal carries a much bigger revenue cost.
Separately, a group of House Republicans wrote to Treasury Secretary Scott Bessent in March 2026 asking Treasury to index capital gains for inflation by regulation — without needing Congress at all, by redefining how “cost basis” is calculated. That approach is legally contested and would likely face an immediate court challenge if attempted.
As of mid-2026, none of this has passed. The exclusion still works exactly as described above.
Common Issues to Watch Out For
1. Assuming you owe tax you don’t. Most home sellers never come close to these caps. If your gain is under $250K (single) or $500K (married), none of the legislative back-and-forth changes your tax bill — you already owe nothing.
2. Not tracking capital improvements. I see this constantly — people forget to save receipts for a new roof or a remodel done a decade ago, then can’t document a higher cost basis when it matters most.
3. Confusing repairs with improvements. Routine repairs and maintenance (painting, fixing a leaky faucet) don’t add to your basis. Capital improvements that add value or extend the home’s life (a new HVAC system, an addition) do.
4. Missing the partial exclusion for a qualifying move. If you sold before the 2-year mark due to a job change, health issue, or similar circumstance, don’t assume you get nothing — you likely qualify for a prorated exclusion.
5. Not accounting for depreciation recapture on a converted rental. If any portion of the home was ever rented out and depreciated, that depreciation gets recaptured and taxed at up to 25%, regardless of the exclusion on the rest of the gain.
Looking Ahead: 2027 Outlook
None of the three bills currently in committee has a clear timeline for a floor vote, and any of them passing before the end of 2026 looks unlikely given the competing revenue and political considerations. The bipartisan More Homes on the Market Act has the best odds longer-term since it’s the cheapest and most defensible version — doubling and indexing rather than eliminating the tax outright.
I’ll update this page if any of these bills advance out of committee, and immediately if anything is signed into law. In the meantime, the highest-value thing you can actually do is keep a running record of every capital improvement to your home — that’s real money in your pocket regardless of what Congress does.
Related reading:
- 2025 and 2026 Updates: Capital Gains Tax Rates — Short and Long Term, Tax Loss Harvesting, and NIIT
- 2026–2027 Year-End Tax Planning: 15 Moves to Make Before December 31
- Tax Loss Harvesting By Selling Stocks and Lowering Your Taxable Income
- 2026-2027 IRS Tax Brackets
