IRS Publication 523 — Selling Your Home

Example. Taylor buys a residence on January 1, 2020, for $400,000 and immediately begins using it as a principal residence. Taylor moves out on January 1, 2023, and immediately begins to rent the home. On December 1, 2024, Taylor sells the property for $600,000. Based on the facts presented, note that the rental period after Taylor’s last qualified use is not considered nonqualified use because nonqualified use during the 5 -year period ending on the date of the sale doesn’t include the time between when Taylor last used the property as Taylor’s principal residence and when Taylor sold the property. See section 121(b)(5)(C)(ii). Because Taylor met the ownership and use tests, Taylor can exclude gain up to $250,000. Taylor had deducted $27,000 for depreciation for the period of rental to a third party. Taylor can’t exclude the part of the gain equal to the depreciation claimed after May 6, 1997, for renting the house ($27,000). This is unrecaptured section 1250 gain. After subtracting depreciation from net gain, Taylor’s net gain reported in Worksheet 3, Section A, Step 3 is $200,000, calculated as follows: Taylor had completed Worksheet 2 and reported $600,000 on line 1, $400,000 on line 4a, and $27,000 on line 5a. Taylor computed figures on Worksheet 2 and reported $227,000 on line 7 ($600,000 - ($400,000 - $27,000)). Taylor transferred the result from line 7 to Worksheet 3. Taylor completed Section A to enter net gain and subtract the $27,000 of depreciation deductions taken. Taylor entered $200,000 in Step 3 of Section A. Taylor skipped Section Bbecause there is no nonqualified use based on the exception under section 121(b)(5)(C)(ii). Taylor completed Section Cfor the column “you completed Section A but skipped Section B” and took the figure from Section A, Step 3 and entered $200,000. The entire $200,000 gain is excludable from gross income because any period after the last qualified use doesn’t constitute nonqualified use.

After subtracting depreciation from net gain in Worksheet 2, line 7, if Taylor’s net gain had exceeded the maximum exclusion amount for a single filer, any capital gain above the threshold ($250,000) would have been reported on Schedule D (Form 1040) as long -term capital gain. However, Taylor must report the $27,000 depreciation on Form 4797. See the Instructions for Form 4797. For information on the treatment of unrecaptured section 1250 gain, see Recapturing Depreciation , later. See also Pub. 544 for information on depreciation recapture. For more information about using any part of your home for business or as a rental property, including information about depreciation deductions, see Pub. 587, Business Use of Your Home, and Pub. 527, Residential Rental Property. See also Pub. 946, How to Depreciate Property. How Much Is Taxable?

Review of the Eligibility Test. Generally, your home sale qualifies for the maximum exclusion if all of the following conditions are true.

• You didn’t acquire the property through a like-kind exchange in the past 5 years.

• You aren’t subject to the expatriate tax.

• You owned the home for at least 2 of the last 5 years and lived in the home for at least 2 (1 if you become disabled) of the last 5 years leading up to the date of the sale.*

• For the 2 years before the date of the current sale, you didn’t sell another home on which you claimed the exclusion.

• You didn’t use a portion of the home outside of the living area, for business or rental purposes.

• You didn’t use the entire property for business or rental purposes or as a second home after 2008.

• The sale doesn’t involve the transfer of vacant land or a remainder interest.** *If this condition isn’t met, your home sale may qualify for a partial exclusion. The sale must involve one of the following events experienced by you, your spouse, a co-owner, or anyone else for whom the home was their residence: a work -related move, a health -related move, a death, a divorce, a pregnancy with multiple children, a change in employment status, a change in unemployment compensation eligibility, or other unusual event. **The transfer of vacant land or of a remainder interest may qualify for the maximum exclusion, but special rules apply in those situations.

For a step -by-step guide to determining whether your home sale qualifies for the maximum exclusion, see Does Your Home Sale Qualify for the Exclusion of Gain?, earlier. If you qualify for an exclusion on your home sale, up to $250,000 ($500,000 if married and filing jointly) of your gain will be tax free. If your gain is more than that amount, or if you qualify only for a partial exclusion, then some of your gain may be taxable. This section contains step-by-step instructions for figuring out how much of your gain is taxable. See Worksheet 3, later, for assistance in determining your taxable gain.

If you determined in Does Your Home Sale Qualify for the Exclusion of Gain, earlier, that your home sale doesn't qualify for any exclusion (either full or partial), then your entire gain is taxable. If you don’t have a gain, you owe no tax on the sale. In either case, you don’t need to complete Worksheet 3 and you can skip to Reporting Your Home Sale, later.

Recapturing Depreciation If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. However, If you used all of your home for business or rental, you may also have to pay back (“recapture”) some or all of the depreciation you were entitled to take on your property. “Recapturing” depreciation means you must include it as ordinary income on your tax return. See Additional Depreciation in 18 Publication 523 (2025)