§ 121. Exclusion of gain from sale of principal residence
(a)
Exclusion
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.
(b)
Limitations
(1)
In general
The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000.
(2)
Special rules for joint returns
In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property—
(A)
$500,000 Limitation for certain joint returns
Paragraph (1) shall be applied by substituting “$500,000” for “$250,000” if—
(B)
Other joint returns
If such spouses do not meet the requirements of subparagraph (A), the limitation under paragraph (1) shall be the sum of the limitations under paragraph (1) to which each spouse would be entitled if such spouses had not been married. For purposes of the preceding sentence, each spouse shall be treated as owning the property during the period that either spouse owned the property.
(3)
Application to only 1 sale or exchange every 2 years
(4)
1 Special rule for certain sales by surviving spouses
In the case of a sale or exchange of property by an unmarried individual whose spouse is deceased on the date of such sale, paragraph (1) shall be applied by substituting “$500,000” for “$250,000” if such sale occurs not later than 2 years after the date of death of such spouse and the requirements of paragraph (2)(A) were met immediately before such date of death.
(4)
1 Exclusion of gain allocated to nonqualified use
(A)
In general
Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use.
(B)
Gain allocated to periods of nonqualified use
For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—
(C)
Period of nonqualified use
For purposes of this paragraph—
(i)
In general
The term “period of nonqualified use” means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.
(ii)
Exceptions
The term “period of nonqualified use” does not include—
(I)
any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,
(c)
Exclusion for taxpayers failing to meet certain requirements
(1)
In general
In the case of a sale or exchange to which this subsection applies, the ownership and use requirements of subsection (a), and subsection (b)(3), shall not apply; but the dollar limitation under paragraph (1) or (2) of subsection (b), whichever is applicable, shall be equal to—
(A)
the amount which bears the same ratio to such limitation (determined without regard to this paragraph) as
(d)
Special rules
(1)
Joint returns
If a husband and wife make a joint return for the taxable year of the sale or exchange of the property, subsections (a) and (c) shall apply if either spouse meets the ownership and use requirements of subsection (a) with respect to such property.
(2)
Property of deceased spouse
For purposes of this section, in the case of an unmarried individual whose spouse is deceased on the date of the sale or exchange of property, the period such unmarried individual owned and used such property shall include the period such deceased spouse owned and used such property before death.
(3)
Property owned by spouse or former spouse
For purposes of this section—
(B)
Property used by former spouse pursuant to divorce decree, etc.
Solely for purposes of this section, an individual shall be treated as using property as such individual’s principal residence during any period of ownership while such individual’s spouse or former spouse is granted use of the property under a divorce or separation instrument (as defined in section
71
(b)(2)).
(4)
Tenant-stockholder in cooperative housing corporation
For purposes of this section, if the taxpayer holds stock as a tenant-stockholder (as defined in section
216) in a cooperative housing corporation (as defined in such section), then—
(5)
Involuntary conversions
(A)
In general
For purposes of this section, the destruction, theft, seizure, requisition, or condemnation of property shall be treated as the sale of such property.
(B)
Application of section
1033
In applying section
1033 (relating to involuntary conversions), the amount realized from the sale or exchange of property shall be treated as being the amount determined without regard to this section, reduced by the amount of gain not included in gross income pursuant to this section.
(C)
Property acquired after involuntary conversion
If the basis of the property sold or exchanged is determined (in whole or in part) under section
1033
(b) (relating to basis of property acquired through involuntary conversion), then the holding and use by the taxpayer of the converted property shall be treated as holding and use by the taxpayer of the property sold or exchanged.
(7)
Determination of use during periods of out-of-residence care
In the case of a taxpayer who—
(B)
owns property and uses such property as the taxpayer’s principal residence during the 5-year period described in subsection (a) for periods aggregating at least 1 year,
then the taxpayer shall be treated as using such property as the taxpayer’s principal residence during any time during such 5-year period in which the taxpayer owns the property and resides in any facility (including a nursing home) licensed by a State or political subdivision to care for an individual in the taxpayer’s condition.
(8)
Sales of remainder interests
For purposes of this section—
(A)
In general
At the election of the taxpayer, this section shall not fail to apply to the sale or exchange of an interest in a principal residence by reason of such interest being a remainder interest in such residence, but this section shall not apply to any other interest in such residence which is sold or exchanged separately.
(9)
Uniformed services, Foreign Service, and intelligence community
(A)
In general
At the election of an individual with respect to a property, the running of the 5-year period described in subsections (a) and (c)(1)(B) and paragraph (7) of this subsection with respect to such property shall be suspended during any period that such individual or such individual’s spouse is serving on qualified official extended duty—
(B)
Maximum period of suspension
The 5-year period described in subsection (a) shall not be extended more than 10 years by reason of subparagraph (A).
(C)
Qualified official extended duty
For purposes of this paragraph—
(i)
In general
The term “qualified official extended duty” means any extended duty while serving at a duty station which is at least 50 miles from such property or while residing under Government orders in Government quarters.
(ii)
Uniformed services
The term “uniformed services” has the meaning given such term by section
101
(a)(5) of title
10, United States Code, as in effect on the date of the enactment of this paragraph.
(iii)
Foreign Service of the United States
The term “member of the Foreign Service of the United States” has the meaning given the term “member of the Service” by paragraph (1), (2), (3), (4), or (5) of section 103 of the Foreign Service Act of 1980, as in effect on the date of the enactment of this paragraph.
(iv)
Employee of intelligence community
The term “employee of the intelligence community” means an employee (as defined by section
2105 of title
5, United States Code) of—
(VII)
any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs,
(10)
Property acquired in like-kind exchange
If a taxpayer acquires property in an exchange with respect to which gain is not recognized (in whole or in part) to the taxpayer under subsection (a) or (b) of section
1031, subsection (a) shall not apply to the sale or exchange of such property by such taxpayer (or by any person whose basis in such property is determined, in whole or in part, by reference to the basis in the hands of such taxpayer) during the 5-year period beginning with the date of such acquisition.
(12)
Peace Corps
(A)
In general
At the election of an individual with respect to a property, the running of the 5-year period described in subsections (a) and (c)(1)(B) and paragraph (7) of this subsection with respect to such property shall be suspended during any period that such individual or such individual’s spouse is serving outside the United States—
(B)
Applicable rules
For purposes of subparagraph (A), rules similar to the rules of subparagraphs (B) and (D) [2] shall apply.
(f)
Election to have section not apply
This section shall not apply to any sale or exchange with respect to which the taxpayer elects not to have this section apply.
(g)
Residences acquired in rollovers under section
1034
For purposes of this section, in the case of property the acquisition of which by the taxpayer resulted under section
1034 [3] (as in effect on the day before the date of the enactment of this section) in the nonrecognition of any part of the gain realized on the sale or exchange of another residence, in determining the period for which the taxpayer has owned and used such property as the taxpayer’s principal residence, there shall be included the aggregate periods for which such other residence (and each prior residence taken into account under section
1223
(6) in determining the holding period of such property) had been so owned and used.
[1] So in original. Two pars. (4) have been enacted.
[2] So in original.
[3] See References in Text note below.