What must a seller do to qualify for the homeowner capital gains tax exclusion?

To qualify for the homeowner capital gains tax exclusion, a seller must have lived in the home for two of the previous five years. This requirement emphasizes the importance of residency in establishing a principal residence, which is essential for the homeowner to take advantage of the tax exclusion provisions.

The Internal Revenue Service (IRS) stipulates that individuals can exclude up to $250,000 of capital gains from the sale of their primary home (or up to $500,000 for married couples filing jointly), provided they meet the ownership and use tests. Specifically, the two-out-of-five-year rule requires that the seller must have used the home as their principal residence for at least 24 months during the five-year period leading up to the sale. This residency factor differentiates a primary home from an investment or secondary property and aligns with the intent of the tax exclusion aimed at supporting primary homeowners.

Other factors, such as ownership length or property improvements, do not directly align with the criteria for the exclusion. For instance, while ownership is important, it only needs to be for two years to meet the criteria mentioned above. Consequently, making improvements or selling below market value does not relate to the capital gains tax exclusion requirements.