Still Taxed Like It's 1997: What the Home Sale Exclusion Means for Connecticut Sellers

The Next Chapter: real answers for homeowners navigating their next move.

When you sell the home you live in, the IRS lets you keep the first $250,000 of profit tax free, or $500,000 for a married couple. Congress set those limits in 1997 and has never raised them. Adjusted for inflation, they'd be about $525,000 and $1.05 million today. Two bills in Washington would raise them, but neither has had a vote, and the law right now is still $250,000 and $500,000. This guide shows you how to figure your own gain, what counts toward your cost, three Connecticut examples with the tax math worked out, and what to do this month.

Save this: Sale price, minus selling costs, minus what you paid, minus what you've put into the house. If what's left is under $250,000 (single) or $500,000 (married), you very likely owe nothing. If it's over, call your CPA before you list, not after.

What is the home sale tax exclusion, and who qualifies?

When you sell the home you live in, the IRS lets you leave part of your profit out of your taxable income. If you're single, you can exclude up to $250,000 of gain. If you're married and file together, it's up to $500,000.

To qualify, you generally need to meet three tests:

• Ownership. You owned the home for at least 24 months of the 5 years before the sale.
• Use. You lived in it as your main home for at least 24 months of those same 5 years. The months don't have to be back to back.
• Timing. You haven't excluded the gain from another home sale in the past two years.

A married couple gets the full $500,000 if either spouse meets the ownership test and both meet the use test. If your spouse has passed away and you haven't remarried, you can generally still use the $500,000 amount when you sell within two years of the date they died. After that it drops to $250,000.

Connecticut starts from your federal income, so gain you exclude on your federal return is generally left out of your state return too.

Why does a number from 1997 matter more every year?

Congress wrote the $250,000 and $500,000 limits into law in 1997 and has never adjusted them. They aren't tied to inflation, so the same dollar amount covers a little less each year.

The Consumer Price Index averaged 160.5 in 1997. In September 2026 it was 336.9, a bit more than double. Run the same math on the exclusion and $250,000 becomes about $525,000, and $500,000 becomes about $1.05 million. Analysts who track housing costs instead of everyday prices come out higher. One estimate puts a single seller's limit near $660,000.

The National Association of Realtors estimates that about one in three homeowners, nearly 29 million households, now have more equity than the single-filer limit protects. It also estimates that nearly 13 million homeowners would owe tax if they sold today.

You don't need a big house to be near the line. The examples below start with an ordinary North Branford ranch.

How do you figure out your own gain?

Your gain isn't your sale price minus what you paid. It's smaller than that, and the difference is where a lot of sellers find relief.

Start with the sale price. Subtract your selling costs: the agent's commission, Connecticut conveyance taxes, your attorney, and other closing costs. Then subtract your basis, which is what you paid for the house, plus the closing costs you paid when you bought it, plus the improvements you've made since. What's left is your gain.

Improvements are the part people forget. Here's how to sort what counts:

Keep every receipt you can find. If some are gone, the town building department keeps permits for work that needed one, like roofs, additions, decks and septic systems. Old contractor invoices and bank statements can fill in the rest.

Here's a one-page worksheet. Fill it in at the kitchen table with your old closing papers beside you.

What would this look like for a Connecticut seller?

These three examples use made-up but realistic numbers. They aren't real clients.

The estimates assume a 15% federal rate and Connecticut's top rate of 6.99% on the taxable part. Your real rate depends on your income, and a 3.8% federal surtax can apply at higher incomes. These are illustrations, not tax advice.

Look at the first two columns. Same house, same sale, same gain. The couple owes nothing and the single owner owes about $24,200. That gap is why this matters so much to widows, widowers and anyone selling alone.

What are the two bills in Washington, and where do they stand?

Neither bill is law. The limits today are still $250,000 and $500,000. The biggest hurdle is cost. A congressional estimate reported by Yahoo Finance put the full change at $46.4 billion in lost federal revenue, and $4.9 billion for a version limited to people over 55.

Should you wait for Congress before you sell?

No. I wouldn't put a move on hold for a bill, and I'd be wary of anyone who tells you to. Bills like these change a lot on the way to passing, if they pass at all. They often apply only to sales after a set date. And the reasons people sell, a health change or a parent who needs you, don't wait for a vote.

If your worksheet shows you near the line or over it, that's a good reason to talk to your CPA now. They can tell you whether your basis was stepped up after a spouse's death or an inheritance, whether any rental or home office use changes things, and how timing might help. Depreciation claimed on part of the house since 1997 isn't covered by the exclusion.

What should you do this month?

1. Find your closing papers from when you bought. If they're gone, your closing attorney or the town clerk's land records can help you find the original price.
2. List your improvements with the year and cost of each. Use permits, invoices and bank statements to fill gaps.
3. Fill in the worksheet above. If you'd like the selling-cost lines done properly, I'm glad to run them for you.
4. If line 10 is above zero, or close, set up a call with your CPA before you list.
5. If your spouse has passed, write down the date. The two-year window runs from it.

If you're weighing a move, these may help too: Can You Afford to Downsize?, The Golden Handcuffs, and What Happens to the House When a Parent Moves to Assisted Living.

I've walked many sellers through the cost side of a sale, and most are relieved to see the real number before they list.

Kim Dawson is a REALTOR® with Coastal Connecticut Homes, serving the Connecticut Shoreline. A North Branford native, she specializes in helping homeowners 50+ navigate downsizing, relocation, and major life transitions.

Kim Dawson REALTOR® 203.481.4605

If you'd like me to run your numbers, I'm glad to. No pressure, no obligation.

This post is general information, not tax or legal advice. Please talk with your CPA or tax attorney about your own situation.

Sources: IRS Topic 701, Sale of Your Home; Real Estate News, August 11, 2026; Yahoo Finance, August 17, 2026; Sen. Mark Kelly, bill announcement; HousingWire on the Nest Egg Protection Act; Considerable; U.S. Bureau of Labor Statistics, CPI.