What criteria must be met for a home to qualify for the capital gains exclusion on sale?

The criteria for a home to qualify for the capital gains exclusion on sale includes the requirement that the taxpayer must have lived in the home for at least two of the last five years prior to the sale. This two-out-of-five-year rule is designed to provide relief to homeowners from paying taxes on the profit they make from the sale of their primary residence.

When a homeowner sells their primary residence, they can exclude up to $250,000 of capital gains from their income if they are single, or up to $500,000 if they are married filing jointly, as long as the residency requirement is met. This requirement ensures that the exclusion is aimed at individuals who have genuinely made the property their home, rather than investors who might buy and sell properties frequently without living in them.

Other options provided do not meet the criteria for exclusion; inheriting a home does not automatically qualify for the exclusion, the timeline for selling is not limited to three years after purchase, and a ten-year primary residence requirement is not necessary. Thus, living in the home for at least two of the last five years is the critical factor for this capital gains exclusion.