Over-55 Home Sale Exemption

Key takeaways

• The over-55 home sale exemption allowed homeowners age 55+ to exclude up to $125,000 of capital gains on the sale of a primary residence.
• The exemption ended in 1997 and was superseded by the Taxpayer Relief Act of 1997, which provides broader, age-neutral exclusions: $250,000 for single filers and $500,000 for married joint filers.
• Under current law, to qualify for the exclusion taxpayers generally must have owned and used the home as their main residence for at least two of the five years before the sale.
• The modern rules permit more than one exclusion over a lifetime but not more than one within any two-year period.

What the over-55 exemption was

The over-55 home sale exemption was a tax provision that let qualifying homeowners aged 55 or older exclude up to $125,000 of capital gains from the sale of their primary residence. It aimed to reduce tax liabilities for older homeowners and help stimulate the real estate market. Sellers using the exemption historically completed IRS Form 2119 to report the sale (and any deferred gain).

How it worked (historical mechanics)

• Age requirement: The seller — or at least one title holder — had to be 55 or older on the sale date. For married couples, only one spouse needed to meet the age test.
• Ownership and use: The titleholder claiming the exemption generally had to have owned and used the property as their primary residence for at least three of the five years prior to the sale (with allowances for temporary absences such as vacations or medical care).
• One exemption per married couple: Married couples could claim only one exemption between them. Unmarried co-owners could each qualify separately if they individually met the age and ownership/use requirements.
• Rollovers and deferrals: Under some circumstances a seller could defer taxable gain by reinvesting sale proceeds in a more expensive home within a specified time frame.

Transition under the Taxpayer Relief Act of 1997

The Taxpayer Relief Act of 1997 eliminated the age-based over-55 exemption and replaced it with a more universal exclusion for home-sale capital gains:
* Exclusion amounts: Up to $250,000 of gain for single taxpayers, and up to $500,000 for married couples filing jointly.
Ownership and use test: To qualify, a seller must generally have owned and used the home as their main residence for at least two of the five years before the sale. Both the ownership and use tests must be met.
Frequency limits: The exclusion can be used more than once in a lifetime, but not for sales that occur within two years of a prior excluded sale by the same taxpayer.

Current qualification rules (summary)

To exclude home-sale gain under the post-1997 rules, a taxpayer must generally:
* Meet the ownership test — owned the home for at least two years during the five-year period ending on the sale date.
Meet the use test — used the home as a primary residence for at least two years during that same five-year period.
Not have excluded gain from another home sale within the two years prior to the sale date.
Special rules can apply for homes used partly for business or rental; gains attributable to depreciation claimed for business/rental use may be taxable.

Example

An owner bought a house in 2000, lived there through 2001, rented it for two years, then moved back in and lived there until selling in 2005. Because the owner lived in the home for at least two of the five years preceding the sale, they meet the use test and may qualify for the exclusion under the post-1997 rules.

Common questions

Q: Can seniors still get a home-sale exclusion?
A: Yes. Seniors qualify under the same ownership/use rules as other taxpayers; there is no longer a separate age-based exemption.

Q: How much gain can I exclude now?
A: Up to $250,000 for single filers and $500,000 for married couples filing jointly, if you meet the tests described above.

Q: Can I use the exclusion more than once?
A: Yes, but not more than once every two years for the same taxpayer.

Q: What if I used the home for rental or business?
A: You may still qualify, but part of the gain (notably depreciation recapture) can be taxable. Consult tax guidance for allocation rules.

Bottom line

The over-55 exemption no longer exists; its core benefit—tax relief on the sale of a primary residence—survives in a more inclusive form under the Taxpayer Relief Act of 1997. The modern exclusion is available to all qualifying homeowners who meet the ownership and use requirements, regardless of age.