Section 121: the home seller's tax break

Internal Revenue Code Section 121 lets primary-residence sellers exclude up to $250,000 of capital gains from federal income tax (or $500,000 for married couples filing jointly). It's the single most valuable tax break available to most US homeowners.

Eligibility — the “2 of 5 years” rule

To claim the full Section 121 exclusion, you must:

Own the home for at least 2 of the 5 years before sale.
Use it as your primary residence for at least 2 of the 5 years before sale.
Not have used the exclusion on another home sale in the past 2 years.

The 2 years don't have to be consecutive, and ownership and use periods can overlap or be different. Special partial-exclusion rules exist for job relocations, health reasons, and unforeseen circumstances.

How the gain is calculated

Capital gain isn't just sale price minus original purchase price. Here's the actual formula:

Realized Gain = Net Sale Proceeds − Adjusted Cost Basis

Net Sale Proceeds = Sale price − commissions − seller closing costs.
Adjusted Cost Basis = Original purchase price + capital improvements (additions, renovations, new HVAC, new roof) − any depreciation you claimed if it was rental property.

Note: repairs are not improvements for tax purposes. Painting, replacing a broken window, fixing the dishwasher — those don't add to your basis. Only capital improvements that materially add value or extend the home's life count.

Capital gains tax rates (2025)

Long-term capital gains (assets held >1 year) are taxed at preferential rates:

0% — single filers up to $47,025 / married up to $94,050 taxable income
15% — single up to $518,900 / married up to $583,750
20% — single above $518,900 / married above $583,750
+3.8% NIIT — on investment income for high earners (single >$200k MAGI / married >$250k MAGI). Not modeled in this calculator.

What this calculator doesn't cover

This is an estimate. We don't model:

State capital gains tax (varies; some states tax cap gains as ordinary income).
3.8% NIIT on high earners (MAGI >$200k single / >$250k married).
Depreciation recapture if the home was ever rented out (taxed at 25%).
Short-term capital gains (if held <1 year, taxed as ordinary income).
Partial Section 121 exclusion for job relocation or health-related sales.

If you have any of those situations, talk to a CPA before closing.

Related calculators

Seller's Net Sheet — pre-tax breakdown of all sale costs.
Real Estate Commission — see how much commission is costing you.
1031 Exchange Calculator — for investment properties (different rules — Section 121 doesn't apply).

Disclaimer: Estimates only. Doesn't include state capital gains tax, NIIT, depreciation recapture for prior rental use, or special situations like partial qualifying use. Capital improvements must be documented to claim the basis adjustment. Consult a CPA before closing — this is not tax advice.