A couple who sell their principal residence may take up to $500,000 in federal capital gains tax-free only if:

Under Section 121 of the Internal Revenue Code, a married couple filing a joint tax return may exclude up to $500,000 of capital gains from the sale of their principal residence. To qualify for this full exclusion, the taxpayers must meet the eligibility test, which primarily requires that they have both owned and used the property as their main home for an aggregate of at least two years out of the five-year period ending on the date of the sale. The two years of residence do not have to be continuous. This provision was established by the Taxpayer Relief Act of 1997, which replaced previous rules that had age or replacement home requirements.

A. The previous one-time exclusion for those over 55 was eliminated; there is no longer an age requirement to qualify for the capital gains exclusion.

B. The requirement to purchase a replacement home of equal or greater value was part of the old "rollover" rule, which was repealed in 1997.

C. The exclusion can be used more than once, provided the taxpayer has not used it for a sale within the previous two-year period.

1. Internal Revenue Service (IRS). (2023). Publication 523, Selling Your Home. "Eligibility Test" section, "Main Home" and "Ownership and Use Tests" subsections. This publication explicitly states, "you must have owned the home and used it as your main home for a period of at least 2 years out of the 5 years ending on the date of the sale." For the $500,000 exclusion, it specifies the requirements for married couples.

2. Cornell Law School Legal Information Institute (LII). 26 U.S. Code § 121 - Exclusion of gain from sale of principal residence. This official legal source outlines the statute, with subsection (b)(2)(A) specifying the dollar limitation for a joint return ($500,000) and subsection (a) detailing the 2-out-of-5-year ownership and use requirement.

3. Ling, D. C., & Archer, W. R. (2021). Real Estate Principles: A Value Approach (7th ed.). McGraw-Hill Education. Chapter 14, "Taxes and Real Estate Investment," discusses the tax treatment of personal residences, detailing the §121 exclusion rules, including the ownership and occupancy tests for qualifying for the $250,000/$500,000 exclusion.