# Understanding the Over-55 Home Sale Exemption and Capital Gains Tax (1997)

![Over 55 Home Sale Exemption](https://www.investopedia.com/thmb/WN0NZHqhB-wDd-wvs2BawlHJ7eM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/over-55-home-sale-exemption2-46c8496917a1458b8583b6e8b8bc3800.jpg)

*— Investopedia / Laura Porter*

## Over-55 Home Sale Exemption: Understanding Its Impact and Evolution

The Over-55 Home Sale Exemption was a significant tax provision for [homeowners](https://www.investopedia.com/updates/first-time-home-buyer/) aged 55 and older, allowing them to exclude up to $125,000 of [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) from the sale of their primary residences. Although this exemption ended in 1997, it remains a noteworthy example of tax legislation aimed at stimulating the real estate market by rewarding long-term homeowners.

The Taxpayer Relief Act of 1997 replaced this age-specific exemption with more inclusive tax benefits, [extending capital gains exclusions](https://www.investopedia.com/terms/deferred-gain-on-sale-of-home.asp) to all taxpayers meeting specific criteria, regardless of age. This evolution reflects a broader approach to relieving the tax burden on homeowners, illustrating the ongoing efforts to balance fiscal policy with economic growth.

### Key Takeaways

*   The over-55 home sale exemption allowed homeowners over 55 to exclude up to $125,000 of capital gains from their taxes when selling a primary residence; however, this exemption ended in 1997.
*   The Taxpayer Relief Act of 1997 replaced the over-55 exemption with a new rule allowing all taxpayers to exclude up to $250,000, or $500,000 for joint filers, from capital gains taxes on their home sales.
*   To qualify for the current capital gains exclusion, homeowners must have owned and used the property as their main residence for at least two of the five years preceding the sale.
*   The exemption under the new law applies more universally, removing age restrictions and allowing for multiple exclusions throughout a taxpayer’s lifetime, subject to specific conditions.

## Detailed Overview of the Over-55 Home Sale Exemption

The over-55 home sale exemption was put into place to give homeowners some relief from the tax implications of selling their homes. The exemption no longer exists as it was replaced by new rules when the [Taxpayer Relief Act of 1997](https://www.investopedia.com/terms/t/taxpayer-relief-act-of-1997.asp) was ratified into law. This act was one of the largest tax reduction acts to be put into place by the United States government.

Under the old rule, qualifying taxpayers could avoid taxes on the sale of their primary residence. Taxpayers using the over-55 exemption completed Form 2119 with the [IRS](https://www.investopedia.com/terms/i/irs.asp), even if they deferred the gain to another tax year. Taxpayers had to report home sale losses on Form 2119 but could not deduct these losses from taxes.

Sellers could avoid taxes by using the sale proceeds to buy a more expensive home within two years.

## Eligibility Requirements for the Over-55 Exemption

While the exemption was active, homeowners had specific criteria to qualify. The seller, or at least one [title](https://www.investopedia.com/terms/t/title.asp) holder, had to be 55 or older on the day the home was sold. For married couples, just one spouse was required to meet this term. That spouse also had to be the titleholder on the date of the title transfer for the exemption to be applied. Only one exemption was allowed per married couple, which would preclude one spouse from claiming the exemption for one sale and the other spouse makes a claim for a later sale.

 If a primary home was co-owned by unmarried people, multiple titleholders could qualify if they met the age requirement. The titleholder must have owned and used the property as a primary residence for at least three of the five years before selling. There were personal [allowances](https://www.investopedia.com/terms/a/additional-personal-allowance.asp) for time spent away for vacations or medical care.

> **Important**
>
> Prior to 1997, in order to receive the exemption, the seller, or at least one title holder, had to be 55 or older on the sale date to qualify for it.

## Transition to the Taxpayer Relief Act of 1997 and Its Impact

Following the passing of the Taxpayer Relief Act of 1997, the new home sale tax burden eased for millions of residential taxpayers regardless of their age. The rollovers or once-in-a-lifetime options similar to the over-55 home sale exemption were replaced with new per-sale exclusion amounts.

Homeowners can [exclude all or part of the gains from their main residence sale](https://www.investopedia.com/principal-residence-exclusion-definition-5211698) from their income. The act raised the amount of excludable gain to $250,000 per taxpayer or $500,000 on a joint return filed by a married couple. The law also permitted more than one exclusion per [taxpayer](https://www.investopedia.com/terms/t/taxpayer.asp) per lifetime. The taxpayer, however, can not exclude the gain from another home sale during the two-year period ending on the sale date.

Post-1997, homeowners are required to pass ownership and use tests if they wish to qualify for these exemptions. To satisfy the ownership test, taxpayers must have owned the home for at least two years. The use test, on the other hand, requires sellers to live in the home as their main residence for at least two years. Both tests must be satisfied during the five-year period up to the date of the sale. Homeowners who use their homes for business or rental income may also qualify. They must pass the homeownership and use tests also.

## Practical Example: Applying the Homeowner's Exemption

For example, if an individual purchased a property in 2000 and lived there until 2001. The owner then rented the property for the following two years. The owner decided to move back once the tenant left and lived there until 2005. The owner then sold the property. In this case, the owner can still qualify for the exemption because the property was used as a [primary residence](https://www.investopedia.com/terms/p/principalresidence.asp) for at least two of the five years leading up to the sale.

## Can I File an Over-55 Home Sale Exemption?

Prior to the passage of the Taxpayer Relief Act of 1997, qualifying homeowners age 55 or older weren't required to pay taxes on the sale of their primary home. When the act passed, it stripped the age requirement out of the home sale exemption.

## Do Seniors Get Exemptions on the Sale of Their Homes?

Seniors, along with anyone, can receive a tax exemption on the amount of money they earn from selling their home if they meet specific criteria, such as having owned and lived in their home for two years before they sold.

## What Is the Taxpayers Relief Act of 1997?

The Taxpayer Relief Act of 1997 was ratified into law and contained various tax reductions to help stimulate the American economy. Among the items were reduced tax rates and tax credits like the [Roth IRA](https://www.investopedia.com/history-roth-iras-5220565) and tax credits for children.

> **Article Sources**
>
> 1.  GovInfo. "[Taxpayer Relief Act of 1997](https://www.govinfo.gov/content/pkg/PLAW-105publ34/html/PLAW-105publ34.htm)."
>     
> 2.  Internal Revenue Service. “[Form 2119 (1991): Sale of Your Home](https://www.irs.gov/pub/irs-prior/f2119--1991.pdf).”
>     
> 3.  Internal Revenue Service. “[Publication 523, Selling Your Home (for Use in Preparing 1997 Returns)](https://www.irs.gov/pub/irs-prior/p523--1997.pdf).” Pages 2-3, 27.
>     
> 4.  Internal Revenue Service. “[Publication 523, Selling Your Home (for Use in Preparing 1997 Returns)](https://www.irs.gov/pub/irs-prior/p523--1997.pdf).” Pages 13, 24-25.
>     
> 5.  Congressional Research Service. “[The Taxpayer Relief Act of 1997: an Overview](https://www.everycrsreport.com/files/19971017_97-854_c1188ffee639c2c20f4f97a7173db9df01d483ca.pdf).” Page CRS-5.
>     
> 6.  Internal Revenue Service. "[Topic No. 701, Sale of Your Home](https://www.irs.gov/taxtopics/tc701)."
>     
> 7.  Internal Revenue Service. “[Publication 523, Selling Your Home](https://www.irs.gov/pub/irs-prior/p523--2023.pdf).” Pages 3-4, 12-13.
>     
> 8.  Congressional Research Service. “[The Taxpayer Relief Act of 1997: an Overview](https://www.everycrsreport.com/files/19971017_97-854_c1188ffee639c2c20f4f97a7173db9df01d483ca.pdf).” Pages CRS-4, CRS-6.