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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) SPLLCAL 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--
(i) either spouse meets the ownership requirements of subsection
(a) with respect to
such property;
(ii) both spouses meet the use requirements of subsection (a) with
respect to such
property; and
(iii) neither spouse is ineligible for the benefits of subsection
(a) with respect to such
property by reason of paragraph (3).
(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
(A) In general
Subsection (a) shall not apply to any sale or exchange by the
taxpayer if, during the 2-year
period ending on the date of such sale or exchange, there was any
other sale or exchange by
the taxpayer to which subsection (a) applied.
(B) Pre-May 7, 1997, sales not taken into account
Subparagraph (A) shall be applied without regard to any sale or
exchange before May 7, 1997.
(4) 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)[(5)] 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--
(i) the aggregate periods of nonqualified use during the period
such property was
owned by the taxpayer, bears to
(ii) the period such property was owned by the taxpayer.
(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,
(II) any period (not to exceed an aggregate period of 10 years)
during which the taxpayer
or the taxpayer's spouse is serving on qualified official extended
duty (as defined in
subsection (d)(9)(C)) described in clause (i), (ii), or (iii) of
subsection (d)(9)(A), and
(III) any other period of temporary absence (not to exceed an
aggregate period of 2 years)
due to change of employment, health conditions, or such other
unforeseen circumstances
as may be specified by the Secretary.
(D) Coordination with recognition of gain attributable to
depreciation
(i) subparagraph (A) shall be applied after the application of
subsection (d)(6), and
(ii) subparagraph (B) shall be applied without regard to any gain
to which subsection
(d)(6) applies.
(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
(B)(i) the shorter of--
(I) the aggregate periods, during the 5-year period ending on the
date of such sale
or exchange, such property has been owned and used by the taxpayer
as the
taxpayer's principal residence; or
(II) the period after the date of the most recent prior sale or
exchange by the
taxpayer to which subsection (a) applied and before the date of
such sale or
exchange, bears to
(ii) 2 years. (2) Sales and exchanges to which subsection applies
This subsection shall apply to any sale or exchange if--
(A) subsection (a) would not (but for this subsection) apply to
such sale or exchange by
reason of--
(i) a failure to meet the ownership and use requirements of
subsection (a), or
(ii) subsection (b)(3), and
(B) such sale or exchange is by reason of a change in place of
employment, health, or, to
the extent provided in regulations, unforeseen circumstances.
(D) SPLLCAL 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--
(A) Property transferred to individual from spouse or former
spouse
In the case of an individual holding property transferred to such
individual in a
transaction described in section 1041(a), the period such
individual owns such property
shall include the period the transferor owned the property.
(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--
(A) the holding requirements of subsection (a) shall be applied to
the holding of such stock,
and
(B) the use requirements of subsection (a) shall be applied to the
house or apartment which
the taxpayer was entitled to occupy as such stockholder.
(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.
(6) Recognition of gain attributable to depreciation
Subsection (a) shall not apply to so much of the gain from the
sale of any property as does
not exceed the portion of the depreciation adjustments (as defined
in section 1250(b)(3))
attributable to periods after May 6, 1997, in respect of such
property.
(7) Determination of use during periods of out-of-residence care
In the case of a taxpayer who--
(A) becomes physically or mentally incapable of self-care, and
(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.
(B) Exception for sales to related parties
Subparagraph (A) shall not apply to any sale to, or exchange with,
any person who
bears a relationship to the taxpayer which is described in section
267(b) or 707(b).
(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--
(i) as a member of the uniformed services,
(ii) as a member of the Foreign Service of the United States, or
(iii) as an employee of the intelligence community.
(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, as in effect on the date of the enactment of this
paragraph [Nov. 11, 2003].
(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 [Nov. 11, 2003].
(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--
(I) the Office of the Director of National Intelligence,
(II) the Central Intelligence Agency,
(III) the National Security Agency,
(IV) the Defense Intelligence Agency,
(V) the National Geospatial-Intelligence Agency,
(VI) the National Reconnaissance Office,
(VII) any other office within the Department of Defense for the
collection of specialized
national intelligence through reconnaissance programs,
(VIII) any of the intelligence elements of the Army, the Navy, the
Air Force, the Marine
Corps, the Federal Bureau of Investigation, the Department of
Treasury, the Department
of Energy, and the Coast Guard,
(IX) the Bureau of Intelligence and Research of the Department of
State, or
(X) any of the elements of the Department of Homeland Security
concerned with the
analyses of foreign intelligence information.
(v) Extended duty
The term "extended duty" means any period of active duty pursuant
to a call or order to
such duty for a period in excess of 90 days or for an indefinite
period.
(D) Special rules relating to election
(i) Election limited to 1 property at a time
An election under subparagraph (A) with respect to any property
may not be made if
such an election is in effect with respect to any other property.
(ii) Revocation of election
An election under subparagraph (A) may be revoked at any time.
(E) Repealed.
(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.
Caution: Code section 121(d)(11), below, as added by P.L. 107-16,
and redesignated by
P.L. 108-121 and P.L. 109-135, for estates of decedents dying
after December 31, 2009,
was repealed by P.L. 111-312, with an exception for decedents
dying in 2010. See
Publication 4895.
(11) Property acquired from a decedent
The exclusion under this section shall apply to property sold by--
(A) the estate of a decedent,
(B) any individual who acquired such property from the decedent
(within the meaning of
section 1022), and
(C) a trust which, immediately before the death of the decedent,
was a qualified
revocable trust (as defined in section 645(b)(1)) established by
the decedent,
determined by taking into account the ownership and use by the
decedent.
(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--
(i) on qualified official extended duty (as defined in paragraph
(9)(C)) as an employee of
the Peace Corps, or
(ii) as an enrolled volunteer or volunteer leader under section 5
or 6 (as the case may be)
of the Peace Corps Act (22 U.S.C. 2504, 2505).
(B) Applicable rules
For purposes of subparagraph (A), rules similar to the rules of
subparagraphs (B) and
(D) shall apply.
(E) DENIAL OF EXCLUSION FOR EXPATRIATES
This section shall not apply to any sale or exchange by an
individual if the treatment
provided by section 877(a)(1) applies to such individual.
(F) ELECTION TO HAVE SELECTION 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 (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.
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