Selling Primary House

IRC §121 allows homeowners to exclude up to $250,000 of capital gains from the sale of their principal residence from their taxable income. For married couples filing jointly, this exclusion increases to $500,000. Any gain exceeding these amounts is subject to capital gains tax at 0%, 15%, or 20% depending on your bracket, plus the 3.8% NIIT on the taxable excess (section “Net Investment Income Tax (NIIT)”) — the exclusion also removes the excluded gain from net investment income, which is a second, quieter benefit. Properly documenting home improvements and selling expenses reduces the taxable gain and is the only lever you control after the fact.

Notice what is missing from those numbers: an inflation adjustment. Congress set $250,000/$500,000 in the Taxpayer Relief Act of 1997 and never indexed them, so nearly three decades of price growth have eroded the exclusion in real terms by well over half. In a Tier-1 coastal market a couple who bought twenty years ago is routinely sitting on $1.5–2 million of gain against a $500,000 shield, which makes the exclusion a minor relief, not a plan. Assume it will keep eroding, and build the exit around basis (documented improvements), timing, or the step-up at death (section “Capital Gains Resets With Inheritance”) — not around §121 doing the work.

More details are covered in section “Selling Houses”.