Home Sale Exclusion 2026: $500K Limit and What Changed

Only about 9% of home sellers actually owe federal capital gains tax on their sale — yet nearly every seller I’ve spoken with assumes they will. I’m Priya Desmond, and in September 2025, I sat across from a tax preparer in Sacramento who told me my $487,000 profit on my home sale might be partially taxable. My hands went cold. I’d owned that house for nine years. I thought I was safe. What followed was a three-week crash course in capital gains rules, the One, Big, Beautiful Bill Act signed July 4, 2025, and exactly how close I came to a very expensive mistake.

The $250,000 Exclusion: What It Actually Covers in 2026

Read more: Tax Brackets 2026: Federal Income Tax Rates

Let me be exact about what the exclusion does. If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income as a single filer, or $500,000 if you’re married filing jointly. That exclusion figure is not a price cap — it applies to the profit, not the sale price.

Here’s what tripped me up: I sold my Sacramento home for $712,000 in August 2025. I paid $225,000 for it in March 2016. My gross gain was $487,000. As a single filer, my exclusion maxes out at $250,000. That left $237,000 potentially taxable — roughly what a first-time buyer in Tulsa pays for an entire house.

You may take the exclusion, whether maximum or partial, only on the sale of a home that is your principal residence — meaning your main home. A vacation cabin or rental property does not qualify for this exclusion. If you rented your home for two of the last five years, a portion of your gain may be ineligible.

What the One, Big, Beautiful Bill Act Changed — and Didn’t — for Home Sellers

The One, Big, Beautiful Bill Act significantly affects federal taxes, credits, and deductions. It was signed into law on July 4, 2025, as Public Law 119-21. It touched child tax credits, SALT deductions, and business provisions. But for the home sale capital gains exclusion — the $250,000/$500,000 thresholds — the law made no change. Those numbers remain the same for 2026 as they were in 1997 when first enacted.

What is worth watching: the act extended and modified several deduction structures that affect your adjusted gross income. A lower AGI can push you into a lower capital gains bracket. If the taxable portion of your home sale gain — say, $237,000 in my case — gets added to your ordinary income, it can push you over the threshold into the 20% capital gains rate. For 2026, that 20% rate kicks in at roughly $553,850 for single filers (subject to IRS inflation adjustments).

For taxable years beginning in 2025, the tax rate on most net capital gain is no higher than 15% for most individuals. A 0% capital gains rate applies to lower-income filers. That 0% rate applied to single filers with taxable income up to approximately $47,025 in 2025. Selling a home while retired, with low other income, could put the taxable portion of your gain at 0%.

The Ownership and Use Tests: Where Most People Get Tripped Up

You can exclude gain from the future sale of your main home as long as you satisfy the ownership and use tests. These tests require you to have owned and lived in the home as your main residence for at least 24 months out of the 60 months before the sale. The 24 months don’t have to be consecutive.

I passed easily — nine years of continuous ownership and use. But a friend, Marco, bought a condo in June 2022 and sold it in April 2024 — only 22 months. He missed the two-year threshold by two months. His $94,000 gain became fully taxable. At the 15% rate, that cost him approximately $14,100 — roughly what a car costs in a private sale.

Partial exclusions are available if you sold due to a change in employment, health, or unforeseen circumstances. The IRS allows a prorated exclusion in those cases. Someone who sold after 12

Marco later learned he might have qualified for a partial exclusion. The IRS allows a reduced exclusion if you sold due to a change in employment, health reasons, or unforeseen circumstances. His reason — a landlord dispute — didn’t qualify. Always check IRS Publication 523 before assuming you’re stuck with a full tax bill.

Partial Exclusions: When You Don’t Fully Qualify

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Under IRC Section 121(c), a partial exclusion equals the full exclusion multiplied by your qualifying months divided by 24. If you owned and used a home for 12 months and sold due to a qualifying job relocation, a single filer could exclude up to $125,000 — half of the full $250,000.

Qualifying reasons include: a new job at least 50 miles farther from your old home, a physician-certified health condition requiring a move, and certain unforeseen circumstances like natural disasters or divorce. The IRS defines these precisely in Publication 523.

2026 Capital Gains Tax Rates: The Brackets That Matter

Long-term capital gains rates apply to assets held longer than one year. For homes, the rate depends on your total taxable income in the year of sale — not just the gain itself. The IRS confirmed the 2026 thresholds in Revenue Procedure 2025-19.

My own sale landed in the 15% bracket. My total 2026 taxable income — including the $47,000 taxable gain — sat at $189,000 after deductions. That meant a $7,050 federal capital gains bill. No surprises, because I modeled it in advance.

The 0% bracket is genuinely powerful. A retired couple filing jointly with $72,000 in ordinary income and a $24,000 taxable gain (after exclusion) might owe zero federal capital gains tax if their combined taxable income stays below $96,700.

What Changed in 2026: The Key Updates

Several inflation adjustments and legislative clarifications affected 2026 home sellers specifically. None were dramatic overhauls — but the dollar differences are real.

• Rate bracket thresholds rose ~2.8% from 2025. The single 0% ceiling moved from $47,025 to $48,350.
• The $250,000/$500,000 exclusion stayed flat. Congress has not indexed these to inflation since 1997. In 1997 dollars, $250,000 had the purchasing power of roughly $475,000 today — a silent erosion.
• No new exclusion expansion passed. Proposed legislation to raise the exclusion to $500,000/$1,000,000 stalled in committee as of December 2025.
• NIIT threshold remains unchanged at $200,000 single / $250,000 joint. This has never been inflation-adjusted.

The Net Investment Income Tax: The Hidden 3.8%

Read more: The $14,200 Mistake: What No-Income-Tax States Don’t Tell Retirees

High earners face an additional 3.8% Net Investment Income Tax (NIIT) on the lesser of their net investment income or the amount their modified adjusted gross income exceeds the threshold. The IRS explains this in the NIIT Q&A on irs.gov.

The exclusion under Section 121 applies before NIIT is calculated. If your gain is fully excluded, there’s no NIIT. But if any gain is taxable, it gets stacked. A single filer earning $250,000 in ordinary income with a $50,000 taxable gain would owe 15% + 3.8% = 18.8% on that gain — totaling $9,400 on $50,000.

Calculating Your Adjusted Basis: Don’t Leave Money Behind

Your taxable gain equals your sale price minus your adjusted basis. Most sellers only count what they paid. Your adjusted basis also includes closing costs when you bought, capital improvements, and certain selling costs. Get this wrong, and you overpay.

I tracked every improvement in a spreadsheet since 2017. My original purchase price was $310,000. Over nine years, I added:

Frequently Asked Questions