Realtors: It’s not uncommon for sellers to ask whether they’ll owe taxes on the sale of their home — and sometimes, the question comes up right at the closing table. Knowing the basics of the primary residence or Section 121 capital gains exclusion can help you guide your clients with confidence and avoid surprises when tax season rolls around.
We recently received a question from a Realtor at closing about why a Form 1099-S is issued at some closings but not others. If you’ve ever wondered the same, or if your clients have questions about paying capital gains tax, this article will help clarify the rules around the primary residence exclusion.
What Is the Section 121 Exclusion?
The Section 121 Exclusion, often referred to as the primary residence exclusion, allows homeowners to exclude up to $250,000 of capital gains from the sale of their home, or up to $500,000 for married couples filing jointly, if they meet certain requirements.
In simple terms, if a qualifying homeowner sells their primary residence for a gain below those limits, they typically won’t owe federal capital gains tax on that profit.
Key Requirements for the Exclusion
To qualify for the Section 121 exclusion, sellers must meet both ownership and use requirements:
- Primary residence: The seller must have owned and used the home as their primary residence for at least two of the past five years before the sale.
- Non-consecutive years count: The two years don’t need to be consecutive — there can be gaps in occupancy.
- One home at a time: The IRS allows only one primary residence per taxpayer at any given time.
What Happens If the Gain Exceeds the Limit?
If a seller’s profit exceeds the exclusion limit, the excess portion may be subject to capital gains tax.
Example:
A single taxpayer sells their home for a gain of $300,000. They can exclude $250,000, but the remaining $50,000 is taxable.
The tax rate depends on the seller’s income and whether the gain is short-term or long-term — with long-term capital gains typically taxed at a lower rate.
Exceptions and Special Circumstances
The IRS provides a few exceptions to the general rules. For example:
- Transfers between spouses or ex-spouses for no consideration generally aren’t treated as gains or losses.
- U.S. military service members may qualify for extended timelines or additional relief.
- Separation, divorce, or death of a spouse can also affect eligibility.
It’s important to note that this exclusion only applies to primary residences — not vacant land, rental properties, or investment homes. Those types of sales follow different tax rules. For details, see IRS Publication 523.
What About Partial Exclusions?
If a homeowner doesn’t meet the full two-year requirement, they might still qualify for a partial exclusion, especially if the sale was due to:
- A change in workplace location
- A health-related move
- Certain unforeseeable events, as defined by the IRS
A qualified tax professional can help determine eligibility and calculate any partial exclusion amount.
Reporting the Sale
At closing, sellers often receive a Form 1099-S, which reports proceeds from the sale of real estate. Even if the gain is fully excluded, the IRS still requires the sale to be reported on the seller’s tax return.
Typically, the closing agent or title company issues this form and sends it to the IRS.
How Often Can the Exclusion Be Claimed?
The Section 121 exclusion can only be claimed once every two years. If a homeowner has already excluded gains from another home sale within that period, they’ll need to wait before using it again.
Could This Exclusion Go Away?
There has been political discussion — including a proposal from Rep. Marjorie Taylor Greene (R-GA) — to eliminate capital gains taxes on primary home sales altogether. However, as of now, this remains a proposal only, and no official legislative changes have been enacted.
Final Thoughts for Realtors and Homeowners
Encourage your clients to keep detailed records of their purchase price, home improvements, and any selling expenses. These records help accurately calculate gains and verify eligibility for the exclusion.
Remind them that depreciation, state, or local tax laws can also influence their overall tax liability. When in doubt, consulting a qualified tax professional is the best way to ensure compliance and maximize available tax benefits.
At Macon County Title, we work closely with Realtors, lenders, and attorneys to make every closing as smooth and stress-free as possible. Whether you’re helping a first-time seller or a long-time homeowner, our experienced team is here to handle the details — so you can focus on your clients.
Have a question about closings, title insurance, or Form 1099-S?
We’re always happy to help. Contact us today to learn more.