Exclusive Report: Understanding IRS Section 121 and Its Impact on Selling Your Home

The Section 121 Exclusion lets homeowners exclude up to $250,000 in gains from the sale of their primary residence from their taxable income. Couples filing jointly can exclude up to $500,000.

To qualify, you must own and live in the home as your main residence for at least two years out of the five years before the sale. Check your occupancy dates with a tax advisor, using past tax returns for verification.

Key Details about the Section 121 Exclusion (also called the principal residence tax exclusion):

• You can sell your primary residence and avoid paying taxes on the gains, as long as you meet the criteria.
• You don’t have to reinvest the sale proceeds into another home to claim the exclusion.
• You qualify for this exclusion even if the home you sell is located outside the U.S.

What types of sales don’t qualify for the Section 121 Exclusion?

• Investors who buy properties to rent out can’t use this exclusion.
• You can’t use it for homes that aren’t your primary residence, like vacation or secondary homes.

The main rule, the “ownership and use test,” requires that you own and live in the home as your primary residence for at least 24 months out of the 60 months (five years) before selling it. These 24 months don’t have to be consecutive. For example, you could live in the home for a year, move out for three years, then return and live in it for another year to meet the two-year requirement. You can even meet the ownership and use periods during different two-year stretches.

If you rented out the home or used it for business purposes during part of the five-year period, you can only exclude a portion of the gain. The excluded gain depends on how long you used the home for personal purposes versus business. For instance, if you lived in the home for two years and rented it for three, you would pay taxes on three-fifths of the gain and exclude two-fifths.

You can only use the exclusion once every two years. If you sold another home and took the exclusion within the two years before selling your current home, you won’t qualify.

Special Exceptions for Employment, Health, and Other Circumstances

In some situations, the exclusion rules become more flexible. If you have to move because of a job change, health problems, or other unforeseen circumstances, you may still qualify. Additionally, if you or your spouse serve in the military or government service and are stationed more than 50 miles from home for over 90 days, or are required to live in government housing, you can suspend the five-year period for up to 10 years.

Summary:

When you live in a home as your principal residence for at least two of the last five years and don’t rent it out during that time, you can take advantage of Section 121 for a significant tax break. This exclusion allows you to exclude up to $250,000 from taxable income as an individual and up to $500,000 as a couple filing jointly. However, you can’t use it for rental properties, vacation homes, or business-related real estate, and you can only claim it once every two years.

For additional information please contact your tax expert and review IRS guidance: https://www.irs.gov/taxtopics/tc701