You Make the Call - March 26, 2026

Question: Taylor and Avery bought a home on Feb. 12, 2021, for $320,000. They used the home as their principal residence from the purchase date until they sold it on Feb. 20, 2026. During that time, they added a room for $30,000 and replaced the roof for $20,000. They sold the home for $760,000 and paid $35,000 in selling expenses. They file a joint return, and neither spouse excluded gain from the sale of another home during the two-year period ending on Feb. 20, 2026. Can Taylor and Avery exclude the full gain on the sale under §121? 

Answer: Yes. Taylor and Avery may exclude the full gain on the sale under §121. To qualify for the exclusion, taxpayers must meet the ownership test and the use test during the five-year period ending on the sale date. Married taxpayers filing jointly may exclude up to $500,000 of gain if: either spouse meets the ownership test, both spouses meet the use test and neither spouse used the exclusion on another home sale during the prior two years.  

Taylor and Avery meet those requirements. Their adjusted basis is $370,000, figured as the $320,000 purchase price plus $50,000 of capital improvements. Their amount realized is $725,000, figured as the $760,000 selling price minus $35,000 of selling expenses. Their gain is $355,000. Because that gain is less than the $500,000 maximum exclusion for an eligible joint return, none of the gain is taxable.