Profits from home sale and IRA income limit?

[EC101]

I searched for this specific question but didnt find any answers so forgive me if this has been answered before and I have just overlooked it. 

If someone owns their home for 5 years and lives in it for any 2 years of the 5, the IRS gives a capital gains exclusion when that person sales that home.  Does this exclusion of capital gains also apply to income limits of IRA/Roth IRAs?  For example, Lets say its 2022 and a single person makes $50,000 from their job.  In 2022 they also sell their home for a $150,000 profit.  That would put them at making $200,000 for that year which would be well over the $144,000 IRA income limit for 2022.  Would they still be able to contribute $6,000 to their IRA/Roth IRAs since the $150,000 profit from the house is a capital gains exclusion or does that $150,000 get included as income even though the IRS treats it as a capital gains exclusion?

[macuser_22]

The IRA limits are based on you AGI.   Exclusions, deductions, including capital gains, do not add to your AGI.

[TomD8 · Accepted solution]

A few points:

There are no income limits for making Traditional IRA contributions.  However, the deductibility of Traditional IRA contributions has income limits.

There are income limits for making Roth IRA contributions.

The Roth IRA income limits are based on your modified AGI, which does include your capital gains.

To be eligible to contribute to either type of IRA, you must have taxable compensation, which does not include capital gains.

[EC101]

Thanks for the replies.  I was thinking more about Roth IRAs and the income limit on those when I asked the question.  I included traditional IRAs in the conversation because I know there are also income limits for tax-deductible contributions to traditional IRAs which of course is a bit different.  I should have worded my question better to differentiate the two scenerios.

From the replies I take it that as long as you meet the requirements of living in your home 2 out of the last 5 years and get the capital gain exclusion when you sell it, that profit would not count against your income limit for being able to contribute to a Roth IRA and for a traditional IRA that profit would not count against your income limit  for tax-deductible contributions?

[DanielV01]

@EC101  You might find this link helpful to determine your MAGI for a Roth contribution:   Modified AGI.  This link will take you to a table the IRS provides.  You will note that it starts with your AGI, and then has certain add-backs for what would otherwise be "above-the-line" deductions for the tax return.  Excluded income (such as the sale of home exclusion) is not added back.  So it will not count towards your MAGI, as @macuser_22 points out.

One strategy you might be able to still use if you cannot make a direct Roth contribution is to make a back-door Roth contribution instead.  With a back door, you make a contribution to a Traditional (nondeductible) IRA and immediately convert it to a Roth.  Congress is looking into closing this loophole and disallowing the back-door Roth.  

[fanfare]

If the capital gain exclusion covers all the profit you made on the house sale, then there is no tax on that gain.

Your AGI does not go up either.

[mturtle]

Hello. Just wondering if you figured out if capital gains exempt from tax had any affect on ROTH IRA contributions?

[dmertz]

Excluded capital gains are not part of your AGI and are therefore not part of your modified AGI for the purpose of an IRA contribution.  Only the capital gains that add to your AGI potentially affect your eligibility to contribute to a Roth IRA or your eligibility to deduct a traditional IRA contribution.