The basics: Section 121 in plain English

If you bought your Northern Virginia home in the 1990s or early 2000s and you’re thinking about selling in 2026 to retire and relocate, the single biggest financial question on your mind is probably: how much of this gain do I actually get to keep?

The answer for most NoVA retirees is “more than you think,” thanks to Section 121 of the Internal Revenue Code, which provides a substantial federal capital-gains exclusion on the sale of a primary residence. This guide explains how Section 121 works in plain English, walks through three worked examples drawn from typical Northern Virginia scenarios, and flags the most common retiree-relocation mistakes that can erode the exclusion.

Important: David Mount is a REALTOR®, not a tax advisor. This article describes how Section 121 works in general terms based on long-standing IRC provisions. Always work with a qualified tax professional (CPA or enrolled agent) on your specific situation.

Section 121 of the Internal Revenue Code provides what’s commonly called the “primary-residence capital-gains exclusion.” Here’s the core rule:

If you sell a home that has been your primary residence for at least 2 of the 5 years immediately preceding the sale, you can exclude up to $250,000 of capital gain from federal income tax if you file as a single filer, or up to $500,000 if you’re married filing jointly. The exclusion is per-sale, not per-lifetime, but generally cannot be used more than once every two years.

The exclusion applies to your gain, not your sale price. Gain is calculated as: sale price, minus selling costs (commission, transfer tax, etc.), minus your adjusted cost basis (original purchase price plus capital improvements over the years).

What counts as “ownership” and “use” for the 2-of-5-years test

Section 121 has two tests that must both be satisfied:

Ownership test. You must have owned the home for at least 24 months out of the 5 years ending on the sale date. The 24 months don’t have to be consecutive.

Use test. You must have used the home as your primary residence for at least 24 months out of the same 5 years. Again, not necessarily consecutive, but the use must be as your main home, not as a vacation property or a second home.

For long-tenured NoVA retirees who have lived in the home continuously, both tests are easily met. The tests become important if you’ve moved out before selling, used the home as a rental for a period, or had complex ownership history (divorce, inheritance, etc.).

Worked example #1: Fairfax County couple, married filing jointly

The Smiths bought their home in Mantua in 1998 for $400,000. They’ve lived in it continuously ever since. In 2026 they sell for $1,200,000 to relocate to Sarasota, Florida.

Sale price: $1,200,000
Selling costs (commission + transfer tax + minor repairs): $80,000
Net sale proceeds: $1,120,000

Original purchase price: $400,000
Capital improvements over 28 years (kitchen renovation 2010, two bath remodels 2014, roof 2018, HVAC 2021): $120,000
Adjusted cost basis: $520,000

Capital gain: $1,120,000 minus $520,000 = $600,000

Section 121 exclusion (married filing jointly): $500,000

Taxable gain: $600,000 minus $500,000 = $100,000

The $100,000 is taxed at long-term federal capital-gains rates (15% for most retirees in this income range, potentially 20% at the top brackets) plus Virginia state income tax (5.75% in 2026 at this gain level). Federal: roughly $15,000. Virginia: roughly $5,750. Total tax on the sale: approximately $20,750. The Smiths keep approximately $1,099,250 of the $1,200,000 sale price.

The most important takeaway: the $120,000 in capital improvements reduced their taxable gain by $120,000, saving them roughly $25,000 in combined federal and Virginia tax. Keeping records of every capital improvement matters.

Worked example #2: Arlington single retiree

Ms. Johnson bought her two-bedroom condo in Clarendon in 2002 for $280,000. In 2026 she sells for $750,000 to retire to Asheville, North Carolina.

Sale price: $750,000
Selling costs: $50,000
Net proceeds: $700,000

Original purchase price: $280,000
Capital improvements (kitchen remodel 2015, in-unit washer/dryer addition 2018): $35,000
Adjusted cost basis: $315,000

Capital gain: $700,000 minus $315,000 = $385,000

Section 121 exclusion (single filer): $250,000

Taxable gain: $385,000 minus $250,000 = $135,000

Federal long-term capital-gains tax (15%): $20,250
Virginia state tax (5.75%): $7,762
Total tax: approximately $28,000

Ms. Johnson keeps roughly $722,000 of the $750,000 sale price. If she had been married filing jointly with a $500,000 exclusion, she would have owed almost no capital-gains tax at all, illustrating why marital status and surviving-spouse rules matter (more on the surviving-spouse rule below).

Worked example #3: Loudoun County couple, recent purchase

The Patels bought their Ashburn home in 2010 for $625,000. In 2026 they sell for $1,050,000 to retire to Hilton Head, South Carolina.

Sale price: $1,050,000
Selling costs: $70,000
Net proceeds: $980,000

Original purchase price: $625,000
Capital improvements (basement finish 2014, deck and patio 2017, kitchen update 2022): $90,000
Adjusted cost basis: $715,000

Capital gain: $980,000 minus $715,000 = $265,000

Section 121 exclusion (married filing jointly): $500,000

Taxable gain: $0, the entire gain is shielded by the exclusion.

The Patels owe no federal capital-gains tax on the sale. They may still have Virginia tax considerations on income earned during their part-year residency if they move mid-year, but the home-sale gain itself is fully excluded.

What if you’ve already moved and are selling from out of state? The 3-year clock

This is the single most common retiree-relocation tax mistake.

The 2-of-5-years use test is measured backward from the sale date. So if you stop using your NoVA home as your primary residence and don’t sell within 3 years, you no longer meet the use test, and you lose the exclusion entirely on the next sale.

Concretely: you move to Florida on June 1, 2024. You leave the NoVA home empty (or rent it out) intending to sell “when the market is right.” If you don’t sell by approximately June 1, 2027, the exclusion is gone. A $500,000 federal tax shelter, gone.

The fix is straightforward: if your move-out date is set, your sale-by date should be set with it. David’s workflow is set up for clients who have already moved (see Selling Your Northern Virginia Home From Out of State) so the 3-year clock isn’t a binding constraint on relocation timing.

The surviving-spouse 2-year window

If your spouse has died and you’re selling within 2 years of their death, you can still claim the full $500,000 married-filing-jointly exclusion, even if you’re now technically a single filer. This provision matters significantly for widowed retirees who sell their long-tenured NoVA home and relocate to be near family.

Outside that 2-year window, a surviving spouse who has not remarried files as single and gets the $250,000 exclusion. The $250,000 difference is roughly $50,000 to $60,000 in federal tax for high-equity NoVA homes. Don’t miss the window.

Adjustments to basis: capital improvements that reduce your gain

Your adjusted cost basis is the original purchase price plus the cost of capital improvements over the years. Capital improvements add to your basis dollar for dollar, every dollar of basis increase is a dollar of gain you don’t pay tax on.

What counts as a capital improvement:

• Kitchen renovations (cabinets, counters, appliances)
• Bathroom renovations
• Roof replacement
• HVAC system replacement
• Windows and doors
• Additions (room addition, deck, patio, sunroom)
• Basement finishing
• Major landscaping (hardscape, irrigation, mature trees)
• Solar panel installation
• Driveway replacement
• Fencing
• Garage construction or expansion

What does not count (these are repairs, not improvements):

• Routine painting
• Carpet cleaning or replacement of worn-out carpet
• Appliance repairs
• Lawn maintenance
• Pest control
• Routine HVAC servicing

The line is sometimes fuzzy. A new roof is an improvement; patching a roof leak is a repair. Gutting and remodeling a bathroom is an improvement; replacing a single faucet is a repair. Your CPA will help draw the line on borderline expenses.

Practical guidance: dig out 25 years of receipts before you sell. Even imperfect records are better than none, the IRS generally accepts reasonable substantiation, including photos with date stamps, contractor invoices, and bank/credit-card statements.

Virginia state income tax considerations

Virginia taxes capital gains as ordinary income at a top rate of 5.75% in 2026. Unlike Florida, Tennessee, or other no-state-income-tax destinations, Virginia does not exempt long-term capital gains.

The Section 121 federal exclusion does, however, apply to your Virginia tax calculation: gain that’s excluded for federal purposes is also excluded for Virginia. Only the portion above the federal exclusion is subject to Virginia state tax.

If you’re moving mid-year, talk to your CPA about Virginia part-year residency rules and how to allocate the home-sale gain to your Virginia tax-year. There can be planning value in aligning your closing date and your move-date with your tax-year strategy, particularly if you’re moving to a no-state-income-tax state.

When to consult a CPA vs. an enrolled agent

For most Northern Virginia retiree home sales, a competent CPA who has handled long-tenured primary-residence sales before is the right professional. If the situation is more complex (a partial-rental period, a divorce-related sale, an inherited basis question, or a multi-state residency-shift), an enrolled agent who specializes in real-estate taxation may be a better fit. David is happy to make introductions to several NoVA-area CPAs and EAs experienced with retiree-relocation sales.

Common Section 121 questions from NoVA retirees

How does the $250,000 / $500,000 capital gains exclusion work?

Section 121 lets you exclude up to $250,000 of gain (single filer) or $500,000 (married filing jointly) on the sale of a primary residence, provided you’ve owned and used the home as your main home for at least 2 of the 5 years before the sale. Any gain above the exclusion is taxed at long-term capital-gains rates federally, plus Virginia state tax.

What’s the 2-of-5-years rule?

You must have owned the home for at least 24 months and used it as your primary residence for at least 24 months, both within the 5 years immediately preceding the sale. The 24 months don’t have to be consecutive. For continuously-occupied NoVA retirees, this test is automatically met.

Can I claim the exclusion if I’ve already moved out of my Northern Virginia home?

Yes, as long as you sell within 3 years of moving out. After 3 years of non-residency, you fail the 2-of-5-years use test and lose the exclusion. This is the most common retiree-relocation tax mistake; if you’ve moved out, set a sale-by date.

What if I’ve owned the home for 30 years, does the exclusion still cap at $500,000?

Yes. Section 121 is per-sale, not pro-rated by years owned. A home owned for 30 years gets the same $500,000 exclusion as a home owned for 5 years. The exclusion is generous but capped.

Does Virginia tax my home-sale gain on top of federal?

Virginia taxes capital gains as ordinary income at a top rate of 5.75% in 2026. The Section 121 federal exclusion also applies for Virginia purposes, only the portion above the federal exclusion is subject to Virginia state tax. If you’re moving mid-year to a no-state-income-tax state, talk to your CPA about residency-shift planning.

What capital improvements reduce my taxable gain?

Improvements that materially add value or extend the home’s useful life: kitchen renovations, bath renovations, roof, HVAC, windows, additions, basement finish, major landscaping, solar, driveway, fencing. Routine repairs and maintenance do not. Keep receipts; even imperfect records help.

How does the surviving-spouse capital-gains window work?

If your spouse has died and you sell the home within 2 years of their death, you can still claim the full $500,000 married-filing-jointly exclusion. After the 2-year window, you file as a single and the exclusion drops to $250,000.

Can I use the exclusion more than once in retirement?

Yes, Section 121 can generally be used once every 2 years on different primary residences. So if you sell your NoVA home, buy a Florida primary residence, live there for 2+ years, and then sell to move again, you can claim a fresh exclusion.

What if the home was a rental for some years, does that affect Section 121?

Yes. Rental periods generally don’t count toward the 2-of-5-years use test, and depreciation deductions taken during rental periods can be subject to recapture even if the rest of the gain is excluded. If your home had a rental period (Airbnb, long-term rental, accessory dwelling rental), the analysis gets more complex. Work with a CPA.

Should I sell before I retire or after, does it change my capital-gains tax?

The Section 121 exclusion itself is the same either way. What changes is your overall tax bracket. Pre-retirement sellers may be in a higher ordinary-income bracket but the same long-term capital-gains bracket. Post-retirement sellers may have lower ordinary-income brackets but the same long-term capital-gains bracket. The ordinary income surrounding the sale is what matters most for the gain above the exclusion. Your CPA can model both scenarios.

What’s the most common Section 121 mistake retirees make?

Letting the 3-year non-residency clock expire. Moving out, leaving the home empty or rented, and not selling within 3 years, losing the entire $250,000 / $500,000 federal exclusion. If your move-out date is set, your sale-by date should be set with it.

About David Mount

David Mount is a REALTOR® with The Redux Group of eXp Realty, specializing in helping Northern Virginia homeowners navigate complex sale situations including retiree relocations, inherited property, divorce, and military PCS moves. David grew up in Burke, Virginia and graduated from Lake Braddock Secondary School. With 12+ years of experience and 200+ NoVA transactions, David is well-versed in Section 121 of the Internal Revenue Code as it applies to long-tenured Northern Virginia primary residences. He is an NVAR Top Producers Club Platinum Member (2024 and 2025) with 90+ five-star client reviews.

Reminder: David is a REALTOR®, not a tax advisor. This article describes Section 121 in general terms. For tax advice specific to your situation, work with a qualified CPA or enrolled agent. David is happy to introduce you to several NoVA-area tax professionals experienced with retiree-relocation home sales.

Considering a NoVA home sale and want a clear-eyed look at your equity and likely net? Call David at (571) 946-8418 or email david.mount@thereduxgroup.com.

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