General Rule: An individual can exclude up to $250,000, or $500,000 if married filing jointly, of realized gain on the sale of a principal residence.

Realized Gain
The gain is the selling price minus the individual’s cost basis and expenses of the sale.  The costs of improvements to a home increase the basis, while any depreciation taken on the home decreases the basis.

Requirements
The individual must meet three tests in order for the full gain exclusion to apply.

• The individual must have owned the residence for at least two years of the past five.
• Use: The individual must have occupied the home for periods amounting to two years within the previous five years.
• One Sale in Two Years: The individual cannot claim the exclusion if they have utilized it within the past two years.

Partial Gain Exclusion
If an individual fails to meet these requirements for the full gain exclusion, they may be able to exclude part of the gain if one of the following occurs:

• A change in place of employment
• Health issues
• Unforeseen Circumstances

These requirements give individuals more flexibility to take advantage of this tax break even in pressing circumstances. These requirements are more fluid and subject to specific facts and circumstances of each particular situation.

Rental or Business Use
The gain on a home used for business or rental purposes can be excluded provided it still meets the requirements set forth above. Generally, homes used for rental or business purpose have previously claimed depreciation expense. The portion of the gain resulting from depreciation must be recognized at the time of the sale, yet the remainder of the gain can be excluded.