How do I avoid capital gains tax when selling my primary home in 2025?

The Section 121 exclusion allows you to exclude up to $250,000 of capital gains (or $500,000 for married filing jointly) when selling your primary residence, completely tax-free.

Requirements:

• Ownership test: You owned the home for at least 2 of the 5 years before the sale
• Use test: You lived in the home as your primary residence for at least 2 of the 5 years before the sale (the 2 years do not need to be consecutive)
• Frequency: You have not used the exclusion on another home sale in the past 2 years

Calculating your gain: Sale price minus selling costs (agent commissions, closing costs) minus your adjusted basis (original purchase price plus improvements minus any depreciation taken). Keep records of all home improvements (new roof, kitchen remodel, additions) as they increase your basis and reduce your taxable gain.

Partial exclusion: If you do not meet the 2-year requirements due to a change in employment, health condition, or unforeseen circumstances (as defined in IRS regulations), you may claim a partial exclusion. The excluded amount is prorated based on the time you lived in the home.

Home office impact: If you claimed a home office deduction using the regular method (Form 8829), you may owe depreciation recapture at 25% on the depreciation claimed, even if the rest of the gain is excluded. The simplified method ($5/sq ft) does not create depreciation recapture.

Renting before selling: If you converted your primary residence to a rental, the exclusion still applies if you meet the 2-of-5-year test. However, gains attributable to depreciation claimed during the rental period (called "unrecaptured Section 1250 gain") are taxed at 25% and cannot be excluded.