The tax code quietly rewards smart movers. Under Internal Revenue rules, homeowners can exclude up to $250,000 in gain when single or $500,000 when married filing jointly from the sale of a primary residence.

With planning, you can repeat this benefit every two years and potentially save significant sums across a lifetime.

Rule Basics

Section 121 isn’t complicated: meet two tests within the five years before the sale. First, own the home for at least two years. Second, use it as a primary residence for at least two years. The years need not be consecutive. Meet both tests, and the first $250,000 or $500,000 of gain may be excluded from federal taxes.

C. Andrew Lafond, a CPA and DBA, writes, “Section 121 allows a taxpayer to exclude from gross income a limited amount of gain on the sale or exchange.”

Use Frequency

You can generally claim the exclusion once every two years. That “cooldown” resets on the sale date that used the previous exclusion. Plan your moves so you don’t sell two homes too close together and forfeit eligibility on the second sale.

Rental Complications

A property that was rented can still qualify later, but two big caveats apply. Depreciation you claimed (or could have claimed) during rental periods is recaptured and taxed, regardless of the exclusion. In addition, “nonqualified use” after 2008—rental periods before the home became your primary residence—reduces the portion of gain eligible for exclusion.

Move-Back Tactic

Own a rental with large appreciation? Moving back in can restore eligibility. Live there as your primary residence for at least two years, and ensure two years have passed since your last excluded sale. This “move-back” strategy can transform a big taxable gain into a mostly or entirely excluded one, even after accounting for depreciation recapture.

Proration Math

When there’s nonqualified use, only the primary-residence share of total ownership counts toward the exclusion. Example: Own for 12 years total, live there 8, rent 4 (with some rental years before moving in). If nonqualified use is 3 of those rental years, then 9/12 of the gain is potentially excludable, subject to the $250,000/$500,000 cap. The remaining 3/12 is taxable at long-term capital gains rates.

Worked Example

Assume a married couple bought a house for $700,000, invested $60,000 in improvements, and later sell for $1,520,000. Over the years, they claimed $90,000 of rental depreciation. Their adjusted basis is $670,000 ($700,000 + $60,000 – $90,000).

On a $1,520,000 sale with $70,000 of selling costs, the realized gain is $780,000. If 60% of ownership time qualifies as primary residence, up to $468,000 of gain is eligible for exclusion, capped at $500,000. The remaining $312,000 is taxable, and the $90,000 of depreciation is taxed as depreciation recapture (often at a higher capped rate), typically as part of the taxable gain allocation.

Every-Two-Years Plan

A common playbook: sell Home A using the exclusion, wait at least two years, then sell Home B after satisfying two years of primary residence. Repeat as your life evolves. Homeowners who methodically upgrade residences can shield multiple six-figure gains over decades—without complex entities or exotic transactions.

Timing Tips

Calendar control matters. Track your prior sale date that used the exclusion, the months of primary occupancy on the current home, and your total ownership timeline. If you’re short on qualifying time, a few more months of residency can unlock the full cap and dramatically reduce the taxable portion.

Cost Considerations

Moving twice isn’t free. You’ll lose rental income during a move-back period, and you’ll pay transaction costs when selling. Market risk also matters; waiting to qualify could expose you to price swings. And remember, depreciation recapture is unavoidable—budget for it at up to 25% of prior depreciation.

When To Sell

Run the numbers three ways: sell now and pay full tax, move back and qualify for the full exclusion, or hold and consider a later sale. Compare the tax saved to lost rent, carrying costs, and lifestyle tradeoffs. If your prorated eligible gain already exceeds $250,000/$500,000, an additional few months may not add benefit—sell when your target is met.

Partial Exclusion

The IRS allows a reduced exclusion for specific hardships—certain health, job-change, or unforeseen events. The formula prorates the $250,000/$500,000 limit based on months of qualifying use out of 24. Documentation is critical, and not every situation qualifies, so treat this as a safety valve, not a core plan.

Alternatives

If moving back isn’t practical, a 1031 exchange can defer gain on investment property, but it won’t create Section 121 eligibility. Some owners sequence strategies: convert rental to primary residence, later use Section 121, and accept that only the primary-residence share is excludable while depreciation is recaptured.

Action Checklist

Confirm ownership and occupancy dates with closing statements, leases, and utility bills. Reconstruct basis: purchase, improvements, and depreciation. Estimate total gain, selling costs, and the nonqualified-use ratio. Map your two-year cooldown window. Decide whether moving back, waiting, or selling now delivers the best after-tax outcome.

Conclusion

Section 121 is one of the rare, generous breaks left to everyday owners. With sharp timing, clean records, and a willingness to plan two years ahead, homeowners can harvest equity while minimizing taxes—especially when they track eligibility windows, document improvements, and model the tradeoffs between moving back, waiting, or selling.