
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document affected by Public Law 107-16 Section 542(c)]
[Document affected by Public Law 107-16 Section 542(f)]
[CITE: 26USC121]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
               Subchapter B--Computation of Taxable Income
 
         PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
 
Sec. 121. Exclusion of gain from sale of principal residence


(a) Exclusion

    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) Special 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.

(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) Special 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).

(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 section 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 \1\ (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(7) in determining the holding period of such property) had 
been so owned and used.
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    \1\ See References in Text note below.
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(Added Pub. L. 88-272, title II, Sec. 206(a), Feb. 26, 1964, 78 Stat. 
38; amended Pub. L. 94-455, title XIV, Sec. 1404(a), title XIX, 
Sec. 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1733, 1834; Pub. L. 95-600, 
title IV, Sec. 404(a)-(c)(2), Nov. 6, 1978, 92 Stat. 2869, 2870; Pub. L. 
97-34, title I, Sec. 123(a), Aug. 13, 1981, 95 Stat. 197; Pub. L. 100-
647, title VI, Sec. 6011(a), Nov. 10, 1988, 102 Stat. 3691; Pub. L. 105-
34, title III, Sec. 312(a), Aug. 5, 1997, 111 Stat. 836; Pub. L. 105-
206, title VI, Sec. 6005(e)(1), (2), July 22, 1998, 112 Stat. 805.)

                       References in Text

    Section 1034 (as in effect on the day before the date of the 
enactment of this section), referred to in subsec. (g), probably means 
section 1034 of this title as in effect on the day before the date of 
enactment of Pub. L. 105-34 which amended this section generally and was 
approved Aug. 5, 1997. Section 1034 was repealed by Pub. L. 105-34, 
title III, Sec. 312(b), Aug. 5, 1997, 111 Stat. 839.


                            Prior Provisions

    A prior section 121 was renumbered section 139 of this title.


                               Amendments

    1998--Subsec. (b)(2). Pub. L. 105-206, Sec. 6005(e)(1), substituted 
``Special rules for joint returns'' for ``$500,000 limitation for 
certain joint returns'' in heading and amended text generally. Prior to 
amendment, text read as follows: ``Paragraph (1) shall be applied by 
substituting `$500,000' for `$250,000' if--
        ``(A) a husband and wife make a joint return for the taxable 
    year of the sale or exchange of the property,
        ``(B) either spouse meets the ownership requirements of 
    subsection (a) with respect to such property,
        ``(C) both spouses meet the use requirements of subsection (a) 
    with respect to such property, and
        ``(D) neither spouse is ineligible for the benefits of 
    subsection (a) with respect to such property by reason of paragraph 
    (3).''
    Subsec. (c)(1). Pub. L. 105-206, Sec. 6005(e)(2), reenacted heading 
without change and amended text generally. Prior to amendment, text read 
as follows: ``In the case of a sale or exchange to which this subsection 
applies, the ownership and use requirements of subsection (a) shall not 
apply and subsection (b)(3) shall not apply; but the amount of gain 
excluded from gross income under subsection (a) with respect to such 
sale or exchange shall not exceed--
        ``(A) the amount which bears the same ratio to the amount which 
    would be so excluded under this section if such requirements had 
    been met, as
        ``(B) 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 2 years.''
    1997--Pub. L. 105-34 amended section catchline and text generally. 
Prior to amendment, section related to one-time exclusion of gain from 
sale of principal residence by individual who had attained age 55.
    1988--Subsec. (d)(9). Pub. L. 100-647 added par. (9).
    1981--Subsec. (b)(1). Pub. L. 97-34 substituted ``$125,000 
($62,500'' for ``$100,000 ($50,000''.
    1978--Pub. L. 95-600, Sec. 404(a), substituted ``One-time exclusion 
of gain from sale of principal residence by individual who has attained 
age 55'' for ``Gain from sale or exchange of residence of individual who 
has attained age 65'' in section catchline.
    Subsec. (a). Pub. L. 95-600, Sec. 404(a), substituted ``55'' for 
``65'', ``5-year'' for ``8-year'', and ``3 years'' for ``5 years''.
    Subsec. (b). Pub. L. 95-600, Sec. 404(a), in par. (1) substituted 
provisions respecting dollar limitations for amount of gain for 
provisions setting forth applicable limitations where the adjusted sales 
price exceeds $35,000 and added par. (3).
    Subsec. (d)(2). Pub. L. 95-600, Sec. 404(c)(1), substituted ``5-year 
period'' for ``8-year period''.
    Subsec. (d)(5). Pub. L. 95-600, Sec. 404(c)(2), substituted ``5-year 
period'' for ``8-year period'' and ``3 years'' for ``5 years''.
    Subsec. (d)(8). Pub. L. 95-600, Sec. 404(b), added par. (8).
    1976--Subsec. (b)(1). Pub. L. 94-455, Sec. 1404(a), substituted 
``$35,000'' for ``$20,000'' in three places.
    Subsecs. (c), (d)(5). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck 
out ``or his delegate'' after ``Secretary''.


                    Effective Date of 1998 Amendment

    Amendment by Pub. L. 105-206 effective, except as otherwise 
provided, as if included in the provisions of the Taxpayer Relief Act of 
1997, Pub. L. 105-34, to which such amendment relates, see section 6024 
of Pub. L. 105-206, set out as a note under section 1 of this title.


                    Effective Date of 1997 Amendment

    Section 312(d) of Pub. L. 105-34, as amended by Pub. L. 105-206, 
title VI, Sec. 6005(e)(3), July 22, 1998, 112 Stat. 806, provided that:
    ``(1) In general.--The amendments made by this section [amending 
this section and sections 25, 32, 56, 143, 163, 215, 280A, 464, 512, 
1016, 1033, 1038, 1223, 1250, 1274, 6012, 6045, 6212, 6334, 6504, and 
7872 of this title and repealing section 1034 of this title] shall apply 
to sales and exchanges after May 6, 1997.
    ``(2) Sales on or before date of enactment.--At the election of the 
taxpayer, the amendments made by this section shall not apply to any 
sale or exchange on or before the date of the enactment of this Act 
[Aug. 5, 1997].
    ``(3) Certain sales within 2 years after date of enactment.--Section 
121 of the Internal Revenue Code of 1986 (as amended by this section) 
shall be applied without regard to subsection (c)(2)(B) thereof in the 
case of any sale or exchange of property during the 2-year period 
beginning on the date of the enactment of this Act if the taxpayer held 
such property on the date of the enactment of this Act and fails to meet 
the ownership and use requirements of subsection (a) thereof with 
respect to such property.
    ``(4) Binding contracts.--At the election of the taxpayer, the 
amendments made by this section shall not apply to a sale or exchange 
after the date of the enactment of this Act, if--
        ``(A) such sale or exchange is pursuant to a contract which was 
    binding on such date, or
        ``(B) without regard to such amendments, gain would not be 
    recognized under section 1034 of the Internal Revenue Code of 1986 
    (as in effect on the day before the date of the enactment of this 
    Act) on such sale or exchange by reason of a new residence acquired 
    on or before such date or with respect to the acquisition of which 
    by the taxpayer a binding contract was in effect on such date.
This paragraph shall not apply to any sale or exchange by an individual 
if the treatment provided by section 877(a)(1) of the Internal Revenue 
Code of 1986 applies to such individual.''


                    Effective Date of 1988 Amendment

    Section 6011(b) of Pub. L. 100-647 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply with respect 
to any sale or exchange after September 30, 1988, in taxable years 
ending after such date.''


                    Effective Date of 1981 Amendment

    Section 123(b) of Pub. L. 97-34 provided that: ``The amendment made 
by this section [amending this section] shall apply to residences sold 
or exchanged after July 20, 1981.''


                    Effective Date of 1978 Amendment

    Section 404(d)(1) of Pub. L. 95-600 provided that: ``The amendments 
made by this section [amending this section and sections 1033, 1034, 
1038, 1250, and 6012 of this title] shall apply to sales or exchanges 
after July 26, 1978, in taxable years ending after such date.''


                    Effective Date of 1976 Amendment

    Section 1404(b) of Pub. L. 94-455 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply to taxable 
years beginning after December 31, 1976.''


                             Effective Date

    Section 206(c) of Pub. L. 88-272 provided that: ``The amendments 
made by this section [enacting this section, redesignating former 
section 121 as 122, and amending sections 1033, 1034, and 6012 of this 
title] shall apply to dispositions after Dec. 31, 1963, in taxable years 
ending after such date.''


  Sense of Congress Concerning Tax Treatment of Principal Residence of 
       Members of Armed Forces While Away From Home on Active Duty

    Pub. L. 105-261, div. A, title X, Sec. 1074, Oct. 17, 1998, 112 
Stat. 2138, provided that: ``It is the sense of Congress that a member 
of the Armed Forces should be treated for purposes of section 121 of the 
Internal Revenue Code of 1986 as using property as a principal residence 
during any continuous period that the member is serving on active duty 
for 180 days or more with the Armed Forces, but only if the member used 
the property as a principal residence for any period during or 
immediately before that period of active duty.''


 Transitional Rule in Case of Sale or Exchange of Residence Before July 
                                26, 1981

    Section 404(d)(2) of Pub. L. 95-600, as amended by Pub. L. 99-514, 
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ``In the case of a 
sale or exchange of a residence before July 26, 1981, a taxpayer who has 
attained age 65 on the date of such sale or exchange may elect to have 
section 121 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] 
applied by substituting `8-year period' for `5-year period' and `5 
years' for `3 years' in subsections (a), (d)(2), and (d)(5) of such 
section.''

                  Section Referred to in Other Sections

    This section is referred to in sections 25, 56, 72, 143, 163, 216, 
280A, 464, 1033, 1038, 1274, 1400C, 6012, 6045, 6334, 7872 of this 
title.
