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Apply the residence exclusion, installment method, and like-kind deferral
Sometimes the right answer is pay later or pay on less. A homeowner who meets the tests removes up to a quarter-million dollars of gain from income. A seller who will be paid over years reports the gain as the payments arrive instead of all at once. And an investor who swaps one rental property for another carries the old basis over to the new property. Each path has conditions, and missing one costs you the benefit.
The residence exclusion forgives gain on the sale of a main home when all three tests are met: 24 months of ownership in the 5 years before closing (one spouse suffices on a joint return), 24 months of residence in the same window by each spouse claiming it (the months can scatter), and no exclusion taken on another sale inside the last 2 years. The ceiling is $250,000, or $500,000 for a married couple filing jointly where both meet the residence test and neither is blocked by the look-back. A seller who fails the ownership or residence tests but sells because of a work-related move, a health reason, or another qualifying unforeseen event may still qualify for a partial exclusion, prorated from the shortest of the ownership, residence, and look-back-interval periods. Two portions of the gain stay taxable even when every test is met: depreciation taken for business or rental use of the home after May 6, 1997, which is recognized, and gain allocable to post-2008 nonqualified use — periods when neither spouse used the home as a main home — except trailing time after the last qualified use inside the 5-year window.
A single filer bought a condo in 2019, lived in it through 2024, and sells in 2025 for a $210,000 gain, never having taken an exclusion. She owned and used it far beyond 24 months and the look-back is clean, so the whole $210,000 is excluded. Had she taken $25,000 of home-office depreciation after May 6, 1997, that $25,000 would be recognized and $185,000 excluded.
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you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly.View on the source
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If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement.View on the source
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If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement.View on the source
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You may take the exclusion only once during a 2-year period.View on the source
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you can’t exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997.View on the source
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*If this condition isn’t met, your home sale may qualify for a partial exclusion. The sale must involve one of the following events experienced by you, your spouse, a co-owner, or anyone else for whom the home was their residence: a work-related move, a health-related move, a death, a divorce, a pregnancy with multiple children, a change in employment status, a change in unemployment compensation eligibility, or other unusual event.View on the source
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Step 1 Determine the shortest of the following 3 periods: 1. Your time of residence in the home during the 5-year period leading up to the sale . . . . 2. Your time of ownership of the home leading up to the sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The time that has elapsed between the sale and the date you last sold a home for which you took the exclusion, if applicable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .View on the source
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Both spouses meet the residence and look-back requirements $500,000 filing jointly and one or both spouses meet the ownership requirement.View on the source
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Gain from the sale or exchange of your main home isn’t excludable from income if it is allocable to periods of nonqualified use. Nonqualified use means any period after 2008 when neither you nor your spouse (or former spouse) used the property as your main home, with certain exceptions.View on the source
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Exceptions. A period of nonqualified use does not include: 1. Any portion of the 5-year period ending on the date of the sale or exchange after the last date you or your spouse (or former spouse) used the property as your main home;View on the source
Lena, single, bought a house in 2021 and lived in it as her main home through 2023. She moves out at the start of 2024 and sells it in mid-2024 for a $180,000 gain, took no depreciation, and did not exclude gain on another home sale in the prior 2 years. What is her maximum exclusion?
An installment sale spreads the gain the way the cash arrives. After separating interest from principal, every principal payment carries the same fraction of gain: gross profit divided by contract price. Basis comes back tax-free inside each payment, interest is ordinary interest income, and depreciable property can still force ordinary recapture. On a home held more than a year, straight-line depreciation is unrecaptured section 1250 gain rather than ordinary recapture; nonexcluded gain from it can be reported as installment payments arrive. Sales at a loss cannot use the method at all, and neither can regular sales of inventory or dealer sales. A seller who prefers can elect out and report the entire gain in the year of sale. A sale to a relative adds a special rule: if the related buyer resells before making all payments on the first disposition and within 2 years of it, the original seller treats the resale proceeds as received at that date; marketable securities are carved out, and the rule does not apply where neither disposition had tax avoidance as a principal purpose.
A seller parts with a lot for $600,000; her installment basis is $450,000, so gross profit is $150,000 and the percentage is 25%. A $120,000 payment carrying $20,000 of interest leaves $100,000 of principal, and 25% of it, $25,000, is installment sale income for the year alongside the $20,000 of interest. Were the buyer her son and he flipped the lot the next year, she would accelerate the remaining deferred gain to the flip date.
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In each year you receive a payment, you must include in income both the interest part and the part that’s your gain on the sale.View on the source
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If you sell property at a loss, you can’t use the installment method.View on the source
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The gross profit percentage generally remains the same for each payment you receive.View on the source
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the property (second disposition) under the following circumstances. • The related person makes the second disposition before making all payments on the first disposition. • The related person disposes of the property within 2 years of the first disposition. This rule doesn’t apply if the property involved is marketable securities.View on the source
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If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income.View on the source
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Exception. This rule doesn’t apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax.View on the source
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If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you don’t receive all the sale proceeds in that year.View on the source
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Sale of inventory. The regular sale of inventory of personal property doesn’t qualify as an installment sale even if you receive a payment after the year of sale. See Sale of a Business, later.View on the source
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Dealer sales. Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan aren’t installment sales. This rule also applies to real property held for sale to customers in the ordinary course of a trade or business.View on the source
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If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year.View on the source
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There’s no depreciation recapture income because the building was depreciated using the straight line method.View on the source
Nadia sells land for $150,000 with an adjusted basis for installment purposes of $90,000, no mortgage and no recapture. The buyer pays $30,000 in the year of sale plus adequate stated interest, with the balance in later years. Nadia uses the installment method. How much installment gain does she report in the year of sale, apart from interest?
A like-kind exchange defers gain when one investment in real property becomes another: city lots for farm acreage, one rental building for another. Both sides must be real property held for investment or business use; homes, property held for sale, and personal or intangible property sit outside. In a deferred exchange the replacement property must be identified in writing within 45 days of transferring the relinquished property and received by the earlier of 180 days or the extended due date of the return for the transfer year. Cash or unlike property (boot) does not disqualify the exchange but triggers recognized gain up to its value. The deferred gain is preserved in the substituted basis: the new property starts from the old basis, adjusted for boot and recognized gain, so the tax waits until the replacement is sold for cash. Exchanges with related parties must be reported on Form 8824, also for the 2 years following the exchange year, and if either party disposes of its exchange property within 2 years, the deferred gain is recognized.
An investor with a $140,000 basis swaps a rental lot worth $200,000 for another rental lot worth $190,000 plus $10,000 cash. Realized gain is $200,000 − $140,000 = $60,000; the $10,000 boot makes $10,000 recognized and $50,000 deferred. Her basis in the new lot is $140,000 − $10,000 + $10,000 = $140,000.
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The nonrecognition rules for like-kind exchanges apply only to exchanges of real property, as defined in Regulations section 1.1031(a)-1(a)(3), held for investment or for productive use in your trade or business and not held primarily for sale.View on the source
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Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. The exchange of real estate for real estate is an exchange of like-kind property.View on the source
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if you receive non-like-kind property or money as part of the exchange, you recognize gain to the extent of the value of the other property or money you received in the exchange.View on the source
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If you acquire property in a like-kind exchange, the basis of the property you receive is generally the same as the basis of the property you transferred.View on the source
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The replacement property for the exchange must be identified within 45 days after the property being given up is transferred. The replacement property must be received within 180 days, or by the due date of your tax return (including extensions), whichever is earlier. See Line 5 and Line 6, later, for more details.View on the source
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Identification requirement. You must identify the property to be received within 45 days after the date you transfer the property given up in the exchange. This period of time is called the identification period. Any property received during the identification period is considered to have been identified.View on the source
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The property must be received by the earlier of the following dates. • The 180th day after the date you transferred the property given up in the exchange. • The due date (including extensions) of your tax return for the year in which you transferred the property given up.View on the source
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In 2025, you sold the real property you received to a third party for $220,000. Because you sold property you acquired from a related party (your sister) within 2 years after the exchange with your sister, that exchange is disqualified from nonrecognition treatment and the deferred gain must be recognized on your 2025 return. On your 2025 tax return, you must report your $135,000 gain on the 2024 exchange. You must also report the gain on the 2025 sale on your 2025 return.View on the source
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When To File If during the current tax year you transferred property to another party in a like-kind exchange, you must file Form 8824 with your tax return for that year. Also file Form 8824 for the 2 years following the year of a related party exchange. See Line 7, later, for details.View on the source
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Taylor subtracts line 15 from the sum of lines 18 and 23 and enters $170,000 on line 25.View on the source
Which of the following swaps can qualify for like-kind deferral?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
See the course Or take the free 12-question checkGroundSkill is independently produced and is not affiliated with or endorsed by the IRS. Sources last checked 2026-09-14. Exam preparation, not tax advice.