Lone Tree, Colorado
By Charles Trautman, EA · Reviewed November 2, 2026
Most sellers owe nothing. Long-time owners should check.
When you sell your main home, up to $250,000 of gain is tax-free, or $500,000 for a married couple. For most sellers that covers everything. But the exclusion hasn’t changed since 1997, and Denver-area homes have climbed far past it. If you’ve owned your home for twenty or thirty years, rented it out, or lost a spouse, the details matter.
Current as of October 26, 2026. For combining the exclusion with a 1031 exchange, see the home-sale exclusion and 1031.
To exclude the full amount, three tests must be met on the date of sale.
You owned the home for at least 24 months during the five years ending on the date of sale. The months don’t have to be in a row.
You lived in it as your main home for at least 24 months in that same five years. Short absences, like vacations, count as time living there. The two years of ownership and use don’t have to be the same two years.
You haven’t excluded gain on another home sale in the two years before this one.
Up to $250,000 of gain is excluded, or $500,000 on a joint return if either spouse meets the ownership test, both meet the use test, and neither used the exclusion in the past two years.
A house, condo, townhome, mobile home or houseboat you actually live in most of the time. A vacation cabin or second home doesn’t qualify. (See vacation homes.)
If you sell your home for less than you put into it, the loss isn’t deductible. A home is personal-use property.
Gain isn’t the sale price minus what you paid. It’s the amount you realized minus your adjusted basis, and good records can shrink it a lot.
| Step | What goes in |
|---|---|
| Amount realized | Sale price, minus selling costs: real estate commissions, title and escrow fees, transfer taxes, legal fees, and repairs you agreed to make as part of the sale |
| Starting basis | What you paid, plus most closing costs when you bought: title insurance, recording fees, survey, legal fees (not loan points, prorated taxes or insurance) |
| Plus improvements | Additions, a new roof, a remodeled kitchen or bath, new windows, finished basement, deck, landscaping, new furnace or water heater, a fence. Not ordinary repairs or maintenance. |
| Minus | Depreciation from rental or home office use, insurance payouts for casualty losses, and any energy credits that reduced basis |
| Gain | Amount realized minus adjusted basis |
A couple bought their home in 1998 for $220,000 and put $60,000 into improvements over the years. They sell in 2026 for $1,050,000 and pay $55,000 in commissions and closing costs. Their gain is $715,000 ($1,050,000 − $55,000 − $280,000). They exclude $500,000, and $215,000 is taxable: about $32,000 federally at the 15% capital gains rate, more if the 3.8% net investment income tax applies, plus about $9,500 for Colorado.
Every receipt for an improvement they can find lowers that. $40,000 of documented improvements they’d forgotten about would save them roughly $7,800.
If you don’t meet the two-year tests, or used the exclusion within the last two years, you may still get part of it — if the main reason for the sale was a change in workplace, your health, or something you couldn’t have foreseen. The IRS lists specific events that qualify automatically (Publication 523, “Does Your Home Qualify for a Partial Exclusion of Gain?”); anything else is judged on the facts.
The regulations name reasons that don’t qualify: traffic noise on a busy road, wanting a bigger house after a promotion or a raise, a windfall such as an inheritance or lottery winnings, or a nicer home becoming affordable because mortgage rates fell. Beyond the automatic list, the IRS has allowed partial exclusions in private letter rulings for a remarriage that created a blended family needing more room, the adoption of a child, a second child when the two-bedroom home’s other bedroom was a home office, an elderly parent moving in with an ill adult child to care for her, an adult child moving back home after a divorce, a family that sold after a member was assaulted at home or on the school bus, a burglary, and — despite the road-noise rule — airport noise. A letter ruling binds the IRS only for the taxpayer who asked, but they show where the line is. The regulation itself even allows the exclusion when homeowner association dues doubled, or when an engaged couple bought together and split up before the wedding.
The exclusion is prorated, not the gain. Take the shortest of three periods — the time you lived in the home during the five years before the sale, the time you owned it, and the time since you last used the exclusion — divide by 24 months (or 730 days), and multiply by $250,000. On a joint return, do it for each spouse and add the two. Someone single who lived in the home for 12 months before a job transfer gets 12/24 of $250,000, or up to $125,000 of excluded gain, which usually covers everything after a short ownership. The exception to the two-years-between-sales rule works the same way: if you used the exclusion 18 months ago and must sell again for one of the reasons above, this sale’s limit is 18/24 of the full amount.
Publication 523, Worksheet 1, part B. Enter the dates for each spouse (or just the first column if single). The calculator finds the shortest period, prorates the limit, and compares it with your gain.
This computes the limit only. It assumes the sale was for a work, health or unforeseeable reason; if it wasn’t, and the two-year tests aren’t met, the exclusion is zero. Depreciation from rental or business use is taxable regardless.
Life changes are where the rules most often help, and where we see the most missed opportunities.
Two rules work together. First, a surviving spouse who hasn’t remarried can still use the full $500,000 exclusion if the home sells within two years of the death; after that it drops to $250,000. Second, and usually bigger, the half of the home that belonged to the spouse who died gets a new basis equal to its value on the date of death. The survivor’s basis becomes their own half of the original cost and improvements, plus half of the date-of-death value. On a home bought long ago, that step-up removes half the gain outright, and the exclusion handles the rest. (In a community property state the whole home steps up; Colorado is not one.) The calculator below does the arithmetic.
A transfer of the home between spouses in a divorce isn’t taxable. If you move out and your former spouse keeps living there under the divorce agreement, you’re treated as still using it as your home, so you may still qualify when it’s eventually sold.
If only one spouse qualifies, the couple gets $250,000, not $500,000. Two people who each sell a qualifying home can each exclude $250,000.
A home you inherit gets a basis equal to its value at death, so a prompt sale usually produces little or no gain, and the exclusion isn’t needed. (See when a loved one dies.)
Members on qualified official extended duty can suspend the five-year test for up to 10 years, so a home left behind on orders can still qualify.
If you become unable to care for yourself, time in a licensed care facility counts as living in your home, as long as you lived there at least one year in the five before the sale.
A couple bought their home 10 years ago for $200,000 and added a $60,000 addition. The husband died when the home was worth $900,000; the widow sells 18 months later for $1,000,000 with $80,000 of selling costs. Her basis: her half of the cost and improvements, $130,000, plus the stepped-up half, $450,000 — $580,000. Amount realized $920,000; gain $340,000; sold within two years of the death, so the $500,000 exclusion applies and the taxable gain is zero. Had she waited past the two-year mark, the exclusion would be $250,000 and $90,000 would be taxable. (A shortcut some advisers use — adding the deceased spouse’s $250,000 exclusion to the survivor’s basis — is not how the law works and can be off in either direction; the step-up is based on the home’s value at death, not on a fixed amount.)
For a home owned jointly by a married couple in Colorado (a common-law state). Enter what the couple paid, what they improved, the value when the first spouse died, and the sale.
Assumes the survivor has not remarried, the couple met the two-year ownership and use tests, and no depreciation was taken on the home. Taxable gain is long-term capital gain at 0%, 15% or 20% depending on the survivor’s other income, plus the 3.8% net investment income tax above $200,000.
A home that was ever rented out or used for business can still qualify, but part of the gain may be taxable.
Any depreciation you claimed, or could have claimed, after May 6, 1997, for a home office or rental use is taxed when you sell, at up to 25%. The exclusion doesn’t cover it.
If you rented the home out before making it your main home, years of rental after 2008 are “nonqualified use,” and a matching share of the gain is taxable.
Renting it out after you leave doesn’t reduce the exclusion, as long as you sell within three years of moving out, so you still meet the two-out-of-five test.
If you got the home in a 1031 exchange, you must own it for five years before the exclusion applies at all. (See the exclusion and 1031.)
If your whole gain is excluded and you don’t receive a Form 1099-S, you generally don’t report the sale. Title companies often skip the 1099-S when you certify at closing that the gain is fully excludable.
If you receive a 1099-S, or any gain is taxable, the sale goes on Form 8949 and Schedule D, with the exclusion shown as an adjustment. Keep your closing statements and improvement records for at least three years after filing.
Colorado follows the federal exclusion. Taxable gain is taxed at 4.4% as ordinary income, and a large gain counts toward Colorado’s $300,000 deduction addback. (See Colorado highlights.)
Bills to double the exclusion and index it to inflation, or to end the tax on home sales altogether, have been introduced but haven’t moved out of committee. (See Still pending.)
No. That was the old rule, replaced in 1997. Today the exclusion applies whether or not you buy again.
No. The limit is $250,000 or $500,000 no matter how long you’ve owned the home. That’s why records of improvements matter so much for long-time owners.
If you sell within two years of his death and haven’t remarried, you can use $500,000. His half of the home also gets a new basis at its value on the date of death, which usually reduces the gain a great deal.
Yes, if you lived in it as your main home for two of the five years before the sale. Depreciation claimed while it was rented is still taxed, and years it was rented before you moved in can make part of the gain taxable.
No. A loss on the sale of a personal residence isn’t deductible.
The exclusion is decided by dates, and the gain by records. Bring the closing statements, the improvement receipts and the dates you lived there, and we will run the numbers before you file. Taxes can be tough, but the Tax Shop has your back.