Lone Tree, Colorado
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 11, 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 two years, you may still get part of it if the main reason for selling was one of these.
A new job location at least 50 miles farther from the home than your old one, for you, your spouse, a co-owner or anyone living in the home.
Moving to get, or provide, medical care for a family member, on a doctor’s recommendation.
Divorce or legal separation, death, losing a job, multiple births from one pregnancy, a natural disaster or other casualty, or a change in circumstances that leaves you unable to pay basic living expenses.
The exclusion is prorated. Someone single who lived in the home for 12 months before taking a job in another state gets 12/24 of $250,000, or up to $125,000 of excluded gain. That usually covers everything after a short ownership.
Life changes are where the rules most often help, and where we see the most missed opportunities.
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. On top of that, the half of the home that belonged to the spouse who died gets a new basis equal to its value at death, which can wipe out much of the gain. Together these often make a sale entirely tax-free.
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 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.
Talk to us before you list. Charles is an Enrolled Agent and has been a licensed Realtor since 1982, so we can look at the timing, your basis and the tax on the sale together. Taxes can be tough, but the Tax Shop has your back.