Home-sale exclusion
Exclude up to $250,000 of gain on your main home, or $500,000 filing jointly, if you owned and lived in it two of the last five years. Nothing similar exists for a rental.
Key takeaways
Depreciation always taxed
If you ever rented it out, depreciation you claimed is taxed at up to 25 percent, and the years you rented it before moving in come out of the exclusion.
NY nonresident sellers pay at closing
Selling New York property as a nonresident means an estimated payment at closing, not at filing.
The setup
Sale price − selling costs − adjusted basis
Your taxable gain is the sale price, less your selling costs, less your adjusted basis. The price, your basis, and how you used the property set that number, and only the basis is still within your control once a contract exists.
01Which rules apply
Which rules apply to your sale
How you used the property decides which rules apply.
Sold your main home
The section 121 exclusion is available.
- • Up to $250,000 excluded, or $500,000 filing jointly
- • You owned and lived in it two of the last five years
- • Years you rented it before moving in still cut the exclusion
- • Depreciation you claimed is taxed either way
Sold an investment property
No exclusion. Four routes defer or reduce the gain.
- • 1031 exchange
- • Installment sale
- • Offsetting capital losses
- • Holding until death
A property that was both, rented first and lived in later, runs through the main home rules with a reduced exclusion.
02How gain is calculated
How the gain on a property sale is calculated
Your gain is the sale price, less your selling costs, less your adjusted basis.
| Amount | |
|---|---|
| Sale price | $1,150,000 |
| Less: selling costs | ($69,000) |
| Amount realized | $1,081,000 |
| Less: adjusted basis | ($465,000) |
| Gain on the sale | $616,000 |
Selling costs are the agent commission, legal fees, and the closing costs and transfer taxes you pay as the seller. Adjusted basis is what you paid plus improvements, covered in full further down.
The rate then depends on how long you owned it. More than a year gets long term rates, a year or less gets your ordinary rate. Short term and long term capital gains in New York covers both.
03Home-sale exclusion
The home sale exclusion: $250,000 single, $500,000 married filing jointly
You can exclude up to $250,000 of gain on the sale of your main home, or $500,000 if you are married and file jointly. The home sale exclusion in section 121 applies to a main home only.
Ownership and use, two of the last five years.You must have owned the home and lived in it as your main home for at least 24 months out of the five years before the sale. The 24 months do not have to run together, and vacations and short absences count as time you lived there.
One sale every two years.You cannot claim the full exclusion if you claimed it on another home sold within the previous two years.
The $500,000 amount.One spouse must meet the ownership test, both spouses must meet the use test, and neither may have used the exclusion in the previous two years.
Partial exclusion for a short stay.A work move to a job at least 50 miles farther from the old home, a health reason, or a defined unforeseeable event gives you a prorated exclusion based on the months you did qualify.
Special cases carry their own rules, including military extended duty, a surviving spouse selling within two years of the death, and a move into a licensed care facility. The capital gains tax exemption in NYC covers each of them.
Worked example: a married couple selling a house in Queens
| Amount | |
|---|---|
| Gain on the sale | $616,000 |
| Less: home sale exclusion, married filing jointly | ($500,000) |
| Taxable gain | $116,000 |
The $116,000 is taxed at long term capital gains rates. The basis behind the $616,000 is built further down.
04Nonqualified use
Nonqualified use: why a converted rental gets a smaller exclusion
Renting the property out before you moved in reduces the exclusion in proportion to those years. The rule is section 121(b)(5).
What counts.Any period after December 31, 2008 in which you owned the property and it was not your main home.
What does not count.Any period after you last lived there. Moving out and renting the house before you sell does not reduce the exclusion.
The fraction.Years of nonqualified use divided by total years of ownership. You cannot exclude that share of the gain, whatever your $250,000 or $500,000 allowance is.
The order.Depreciation recapture comes out first. The fraction applies to what remains.
How the nonqualified use fraction is measured
Bought 2016, rented four years, lived in six, sold 2026.
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Rented, before you moved inYour main home
Four nonqualified years out of ten, so 40 percent. That share of the gain can never be excluded, whatever your $250,000 or $500,000 allowance is. Only periods after December 31, 2008 count, and depreciation recapture comes out first.
Worked example: a Brooklyn rental converted to a main home
Bought in 2016 for $500,000, rented for four years, lived in as a main home for six years, sold in 2026 for $900,000, with $72,000 of depreciation claimed while it was rented.
| Amount | |
|---|---|
| Sale price | $900,000 |
| Less: selling costs | ($54,000) |
| Less: purchase price | ($500,000) |
| Add back: depreciation claimed while rented | $72,000 |
| Total gain | $418,000 |
| Amount | |
|---|---|
| Total gain | $418,000 |
| Less: depreciation recapture, outside the exclusion | ($72,000) |
| Gain before the nonqualified use split | $346,000 |
| Less: share allocated to four nonqualified years | ($138,400) |
| Gain the exclusion covers | $207,600 |
$210,400 stays taxable: $72,000 of recapture at up to 25 percent, and $138,400 at long term rates. The $500,000 allowance was never the constraint. The ownership history was.
A property you acquired through a 1031 exchange has an extra condition before section 121 applies at all. How to avoid depreciation recapture covers it.
05Depreciation recapture
Depreciation recapture on a property you once rented
Depreciation you claimed while renting the property is taxed when you sell, and the home sale exclusion never reaches it. It is taxed at up to 25 percent rather than the long term rate, which is why a former rental produces two numbers rather than one.
Why depreciation recapture is taxed at 25 percent covers the rate. How to calculate 1250 recapture covers the arithmetic and the forms.
The three layers of gain on a former rental
Brooklyn example, $418,000 of total gain. The exclusion reaches one layer of three.
$207,600 · Covered by the exclusion
The six years it was your main home.
$138,400 · Nonqualified use
The four rental years, taxed at long term rates.
$72,000 · Depreciation recapture
Taxed at up to 25 percent.
$210,400 stays taxable. The $500,000 allowance was never the constraint, the ownership history was.
06Four routes
Four ways to defer or reduce gain on an investment property
Four routes reduce or defer gain on an investment property. None of them is available on a main home.
| Route | What it does |
|---|---|
| 1031 exchange | Defers gain into replacement investment property |
| Installment sale | Spreads gain across the years you receive the money |
| Offsetting losses | Reduces gain by capital losses realized the same year |
| Holding until death | Passes the property at a stepped up basis |
Each route has conditions worth knowing before you commit. How to avoid depreciation recapture works through all four. Capital loss carryforward against a property sale covers the third. Stepped up basis at death covers the fourth.
07Cost basis
What raises your cost basis and what does not
Your basis is the purchase price, plus capital improvements, plus certain acquisition and selling costs, less any depreciation claimed. It is not the purchase price on its own, and this is the cheapest reduction most sellers leave on the table.
Adds to basis
- • An extension, a new roof, a kitchen or bathroom renovation, a new heating or cooling system, new windows, or permanent landscaping.
- • Title fees, survey fees, recording fees and transfer taxes paid when you bought.
- • Agent commission, legal fees and transfer taxes paid when you sell.
Does not add to basis
- • Repainting, fixing a leak, replacing a broken window, or any other routine repair.
- • An improvement you later removed and replaced, or one with a useful life under one year when it was installed.
- • Mortgage interest, property tax, insurance and utilities. Those are annual costs, not basis.
Comes off basis
- • Depreciation claimed while the property was rented or used for business.
- • Casualty loss deductions you claimed.
- • Energy credits received on an improvement you added to basis.
Worked example: the adjusted basis behind the Queens sale above
| Amount | |
|---|---|
| Purchase price | $380,000 |
| Add: title, legal and recording costs on purchase | $15,000 |
| Add: kitchen and bathroom renovation | $48,000 |
| Add: new roof | $22,000 |
| Adjusted basis | $465,000 |
Without the $70,000 of improvements the taxable gain would have been $186,000 rather than $116,000.
082026 rates
Capital gains tax rates on a property sale in 2026
Long term rates on a property sale are 0, 15 or 20 percent federally, set by your taxable income for the year.
0 / 15 / 20%
Long-term federal capital gains bands
+3.8%
NIIT above $200K single / $250K MFJ
up to 25%
Depreciation recapture rate
- The gain counts toward your own taxable income, so part of a large gain can fall in the 20 percent band even where your salary alone would not reach it.
- Net investment income tax adds 3.8 percent above $200,000 single or $250,000 married filing jointly. Congress set those thresholds in 2013 and they do not move with inflation.
- Depreciation recapture is taxed separately at up to 25 percent.
Capital gains tax rates in New York has the current bands.
09New York
New York City and New York State capital gains tax on a property sale
New York has no separate capital gains rate. New York State taxes the gain as ordinary income, and New York City residents pay city tax on top of that.
If you are not a New York resident and you sell New York property, you pay estimated New York tax at closing rather than at filing. The county recording officer will not record the deed without it.
Form IT-2663covers real property. It goes to the recording officer with payment at the time the deed is presented, not to the Tax Department.
Form IT-2664covers shares in a cooperative housing corporation, which is the common case in Manhattan and Brooklyn.
The payment is a crediton your New York return for the year of sale. You cannot recover any excess before that return is filed.
Contract signed
Gain is now fixed apart from your basis.Form IT-2663 completed
Or Form IT-2664 for shares in a cooperative housing corporation. It computes the estimated tax.Payment to the recording officer
Presented with the deed, not sent to the Tax Department.Deed recorded
The county will not record it without the payment.Credit claimed on your return
Any excess is recoverable only when you file for the year of sale.
Residents certify their exemption on Form TP-584, or Form TP-584-NYC for property in the five boroughs.
On a $418,000 gain a nonresident seller pays roughly $45,600 at closing, calculated at New York's highest personal income tax rate. That is a cash flow event at the closing table for anyone who moved out of state and kept a property.
New York State and New York City also charge transfer tax on the sale, which is normally a seller cost and reduces the gain as a selling expense. Form TP-584 and real estate transfer tax covers it.
10Reporting
How to report a property sale: Forms 1099-S, 8949 and Schedule D
Report the sale on Form 8949 and Schedule D. If the exclusion covers the whole gain and no Form 1099-S was issued, you generally do not have to report the sale at all.
Form 1099-S.The closing agent files it. Once you receive one, report the sale even where the gain is fully excluded.
Form 8949 and Schedule D.Enter the proceeds and the basis, then enter the exclusion as a negative adjustment with code H.
Form 4797.Used where the property was rented or used in a business.
Publication 523.Has the IRS worksheets, including the nonqualified use fraction.
Leaving a reported sale off your return produces a CP2000 notice proposing the tax the IRS believes you owe. Accuracy related penalties run to 20 percent of the underpayment on top of it.
11Records
Records to keep after a property sale
Keep the records that prove your basis until three years after the due date of the return for the year you sell.
Purchase documents.The closing statement, the settlement sheet and the contract showing what you paid.
Improvement receipts.Contractor invoices, contracts and permits for every capital improvement.
Depreciation schedules.Any period the property was rented or used for business, and what you deducted.
Sale documents.The final closing disclosure, Form 1099-S if you received one, and the settlement statement.
Pre 1997 rollover records.A gain you deferred on a home sold before May 7, 1997 under the old rollover rule still reduces your basis today.
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From the record
On planning early, and on multi-state relationships
“You just sold a home and you know you have capital gains. You just got married and you don't know what your taxes are going to look like with your spouse. Plan early because if you don't there might be a surprise.”
George Dimov, CPA
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Model it before you sign
Model it before you sign
Send us the purchase details, what you spent on improvements, and the price you are being offered. We will show you the gain, the recapture, and what is actually excludable, before the contract is signed.
Reviewed by George Dimov, CPA, New York, NY. Serving clients in all 50 states, 15+ years advising individuals and investors on property sales and capital gains planning. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.