Updated October 21, 2026. Quick answer: Worksheet 3 in Publication 523 decides whether a home sale gain is taxable. Section A removes depreciation taken after May 6, 1997, section B removes gain tied to periods of nonqualified use, section C is the gain eligible for exclusion, and section D compares that with your limit from Worksheet 1.
What this worksheet is for
It takes the gain from Worksheet 2 and the limit from Worksheet 1. The general rules are at home sale taxes.
The worksheet section by section
| Step | What the worksheet says |
|---|---|
| Purpose | “Worksheet 3 helps you figure how much of the gain calculated in Worksheet 2 will be excluded under section 121” |
| Section A, step 1 | “Enter your gain from line 7 of Worksheet 2” |
| Section A, step 2 | “List the total of all depreciation deductions that you took or could have taken for the use of all or part of your home for business or rental purposes between May 7, 1997, and the date of sale.” |
| Section A, step 3 | “Subtract the sum of Step 2 from the amount listed in Section A, Step 1. This is your net gain” |
| Section B, step 2 | “Enter the total number of days after 2008 and before the date of sale that neither you nor your spouse (or former spouse) used the entire home as a main residence.” |
| Section B, step 3 | “Enter the total number of days you owned your home (counting all days, not just days after 2008). This number is your number of days owned” |
| Section B, step 4 | “Divide the nonuse days by the days owned. This number is your nonresidence factor” |
| Section B, step 5 | “Multiply the decimal from Section B, Step 4, by the amount listed in Section B, Step 1. This number is your nonqualified use gain” |
| Section C | The form leaves a blank for your gain that is eligible for exclusion. If you completed Section B and skipped A, it is “the amount from Section B, Step 1, less your nonqualified use gain from Section B, Step 5.” |
| Section D, not more than the limit | “your gain that is eligible for exclusion from your income is not to be reported on your tax return.” |
| Section D, more than the limit | “some of your gain isn’t excludable, and you may owe tax on it.” |
A worked example for section B through D
Illustration, not an IRS example. Every input is invented. The filer is single and skipped section A because no business or rental use took place.
| Item | Illustration |
|---|---|
| Section B, step 1: gain from line 7 of Worksheet 2 (invented) | $400,000 |
| Step 2: days after 2008 the entire home was not a main residence (invented) | 730 |
| Step 3: days owned (invented) | 3,650 |
| Step 4, computed: 730 divided by 3,650 | 0.2 |
| Step 5, computed: 0.2 x $400,000 (nonqualified use gain) | $80,000 (computed) |
| Section C, computed: $400,000 minus $80,000 | $320,000 (computed) |
| Exclusion limit from Worksheet 1 (single, full) | $250,000 |
| Section D, computed: $320,000 minus $250,000 | $70,000 (computed) |
The $320,000 is above the $250,000 limit, so section D applies its second row: some of the gain is not excludable. The $80,000 nonqualified use gain is a separate figure from the $70,000 above the limit. The publication sends you to its Reporting Your Home Sale section for what to do next.
When you can skip section B
The worksheet note lets you skip section B if the period of nonuse was “for an aggregate of 2 years or less and due to a change in employment, a health condition, or other” unforeseen circumstance of the kinds the publication lists.
Depreciation is never excluded
“The exclusion of gain doesn’t apply to any gain from depreciation adjustments attributable to periods after May 6, 1997.”
Reporting an excluded gain
The Form 8949 instructions for code H say: “Report the sale or exchange on Form 8949 as you would if you weren’t taking the exclusion.” Then “enter the amount of excluded (nontaxable) gain as a negative number (in parentheses) in column (g).”
Edition and step numbers
This page reads Publication 523 (2025), the current file irs.gov served on 2026-10-21 (sha256 in the kit data). The Worksheet 3 in it is for the tax year 2025 return, filed in 2026. Check the tax year printed on the worksheet in your own copy and use that year’s line numbers, because a different year’s worksheet can word its lines differently.
Common mistakes
- Skipping section A after business or rental use. It applies when you used the home that way “between May 7, 1997, and the date of sale”
- Counting only days after 2008 in the days-owned figure. Step 3 says “counting all days, not just days after 2008”
- Treating a gain at or below the limit as free of any filing. If you received a Form 1099-S you still report the sale on Form 8949.
Related: home sale taxes, Form 8949 code H, home sale depreciation recapture calculator, and rental converted to a primary residence.
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Answer againSources
- Publication 523 (2025), Selling Your Home: https://www.irs.gov/pub/irs-pdf/p523.pdf
- Instructions for Form 8949 (2025), Sales and Other Dispositions of Capital Assets: https://www.irs.gov/pub/irs-pdf/i8949.pdf
Read from the IRS documents linked above on October 21, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.