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The over 55 home sale exemption: what happened to it?

There is no over-55 exemption anymore. The once-in-a-lifetime $125,000 exclusion for sellers 55 and older ended for sales after May 6, 1997. It was replaced by a bigger rule with no age test: up to $250,000 of gain ($500,000 for a married couple) tax-excluded on a main home, usable every two years.

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Short answer

The old rule is gone. The new one is usually better.

Old rule (before May 7, 1997)Today's rule (IRC 121, 2026)
Age test55 or older on the sale dateNone
Amount$125,000 of gain ($62,500 married filing separately)$250,000 per qualifying owner; $500,000 married filing jointly
How oftenOnce in a lifetime. If either spouse had used it, neither could use it again.Once every 2 years
Ownership and useMain home for 3 of the 5 years before the saleOwned and lived in as your main home for 2 of the 5 years before the sale
Companion ruleSection 1034 rollover: defer the gain by buying a replacement home of equal or higher price within 2 yearsRepealed in 1997 along with the old exclusion. No rollover today.

Old rule: former IRC 121 and IRC 1034, repealed by the Taxpayer Relief Act of 1997 (Pub. L. 105-34, sec. 312), signed August 5, 1997, effective for sales after May 6, 1997. Today's rule: IRC 121; IRS Publication 523, Selling Your Home (2025 edition, for 2025 returns), checked October 8, 2026. The $250,000 and $500,000 limits are set in the statute and have not changed since 1997; they are not indexed to inflation.

Today's rule, in plain language

How the $250,000 / $500,000 exclusion works

  1. The 2-of-5-year test. You must have owned the home and lived in it as your main home for at least 24 months (they do not have to be the same 24 months, or in a row) during the 5 years ending on the sale date.
  2. The once-every-2-years limit. You cannot have excluded gain on another home sale in the 2 years before this one.
  3. Married couples get $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 last 2 years. Otherwise each qualifying spouse figures up to $250,000 on their own.
  4. Partial exclusion if you fall short. Selling before 2 years because of a job move (new workplace at least 50 miles farther away), health, or certain unforeseen events can still qualify for part of the exclusion. The limit is prorated: for example, 12 qualifying months out of 24 gives up to $125,000 single or $250,000 joint.
  5. Widows and widowers. A surviving spouse who has not remarried can still use the full $500,000 if the home is sold within 2 years of the spouse's death (IRC 121(b)(4)). The deceased spouse's share of the home also gets a new basis at death, and in community property states such as California both halves do.
  6. Moving into care. If you become unable to care for yourself and move into a licensed care facility, time there counts as living in the home, as long as you lived there at least 1 year of the 5 (IRC 121(d)(7)).
  7. What the exclusion does not cover. Depreciation taken after May 6, 1997 (for a home office or past rental use) is taxed when you sell, at up to 25%. Gain tied to rental use after 2008 that came before you moved in (nonqualified use) can also reduce the exclusion.
Why people still search for the over-55 rule: many parents used it in the 1980s and 1990s, and some real estate and tax articles still mention it. If someone tells you that you can sell once after 55 and owe nothing, ask which law they mean. That law ended in 1997.

Worked example

A couple, both 66, selling the home they bought in 1995

Bought for $150,000, $100,000 of improvements over the years, sold in 2026 for $1,400,000 with $84,000 of selling costs. Married filing jointly, $80,000 of other taxable income, $110,000 of other modified AGI.

StepRule (source below)Amount
Amount realizedPrice minus selling costs$1,316,000
BasisPurchase plus improvements$250,000
Gain$1,066,000
Section 121 exclusion$500,000 jointminus $500,000
Taxable long-term gain$566,000
Federal capital gains tax0% to $98,900, 15% to $613,700, 20% above (2026 joint)$83,680
Net investment income tax3.8% on MAGI over $250,000$16,188
Federal totalabout $99,900

Illustrative and rounded; state tax not included (California, for one, taxes the gain above the exclusion as ordinary income). Under the pre-1997 rule the same couple could have excluded only $125,000, leaving $941,000 taxable. Brackets: IRS Rev. Proc. 2025-32 (2026 inflation adjustments). NIIT: IRC 1411, thresholds not indexed.

If you are over 55 and selling now

Six things sellers actually use today

  1. Rebuild your basis. Every capital improvement since you bought (additions, roof, kitchen, landscaping, solar) adds to basis and lowers the gain. Gather the records before you list.
  2. Count selling costs. Commissions, title, escrow and transfer taxes reduce the amount realized.
  3. Pick the sale year. The gain stacks on top of your other income. A year with lower wages, before required minimum distributions start, or before Social Security begins can keep more of the gain in the 15% band and under the 3.8% line.
  4. Watch Medicare. A large gain raises modified AGI, and Medicare IRMAA surcharges look back 2 years. Check the IRMAA calculator before you pick the closing date.
  5. Know the surviving-spouse window. After a spouse's death, a sale within 2 years can keep the $500,000 exclusion and use the new basis on the deceased spouse's share.
  6. California only: Prop 19. Homeowners 55 and older can move their property tax base to a replacement home anywhere in California, up to three times (Cal. Const. art. XIII A, sec. 2.1, effective April 1, 2021). That is a property tax rule, not an income tax exclusion.

Run your own numbers in the free capital gains tax calculator, or read selling a home with a gain above the exclusion.

Common questions

Straight answers

Is there still a one-time capital gains exemption for people over 55?

No. The over-55 once-in-a-lifetime $125,000 exclusion was repealed by the Taxpayer Relief Act of 1997 for sales after May 6, 1997. Today's Section 121 exclusion has no age requirement.

What replaced the over-55 exclusion?

IRC Section 121 as rewritten in 1997: up to $250,000 of gain ($500,000 married filing jointly) on a main home you owned and lived in for 2 of the 5 years before the sale, usable once every 2 years.

Do seniors get a bigger exclusion today?

No. The amounts are the same at any age. Seniors do get some related rules: time in a licensed care facility can count as living in the home, and a surviving spouse can keep the $500,000 limit for 2 years after a spouse's death.

Is there a capital gains exemption at 65?

No federal one. Age 65 changes your standard deduction and Medicare costs, not the home sale exclusion.

Has the $250,000 / $500,000 limit gone up since 1997?

No. The limits are fixed in the statute and are not indexed for inflation. As of October 8, 2026 they are still $250,000 and $500,000.

Related: Capital gains tax calculator · Selling a home with a large gain · Step-up in basis calculator · IRMAA calculator

Audit trail

Sources and review

Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, retirement educator; IRS Special Enrollment Examination Parts 1, 2 and 3 passed, enrollment pending. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Figures are 2026 federal amounts unless stated. Examples are illustrative and rounded; your numbers will differ. By , founder, Retirement Literacy Foundation. Last reviewed .

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