Did you know?

While many first time buyers buy their first home for investment purposes, a primary residence still does not qualify 1031 exchange as “investment property” The IRS Created section 121 to provide tax savings for people selling their primary residence. 

Section 121 as we know it today was effective may 6, 1997 and replaced (1) the old section 121 which provided a one time exclusion of $125,000.00 if you were over 55 year old and (2) the old section 1034 which provided a rollover provision when selling and buying a home of equal or greater value within a two-year period.

Section 121 allows a homeowner to sell his/her residence and receive a tax exemption on $250,000.00 of the capital gain as an individual taxpayer and $500,000.00 as a married couple filling jointly.

OWNERSHIP AND USE TEST FOR SECTION 121 EXCLUSIONS

• THE HOMEOWNER IS REQUIRED TO HAVE OWNED THE HOME AND USED IT AS A PRIMARY RESIDENCE FOR A TOTAL OF AT LEAST TWO YEARS IN THE FIVE YEEAR PERIOD BEFORE THE SALE DATE. IN THE HOME FOR
• THE TWO YEARS DO NOT NEED TO BE CONSECUTIVE. EVEN IF THE HOME WAS CONVERTED INOT A RENTAL PROPERTY AND THEN REVERTED TO A SRESIDENTIAL HOME, THE HOMOWNER COULD STILL QUALIFY FOR THE EXCLUSION SO LONG AS THEY LIVED IN THE HOME FOR A TWO YEAR PERIOD.
• OWNERSHIP AND OCCUPANCY NEED NOT BE CONCURRENT.
• EXCLUSION MAY ONLY BE USED ONCE EVERY TWO YEARS.

The taxpayer can only have one primary residence at a time. The exclusion does not apply to second homes, vacation homes or property that has been held for rental investment or use in a trade or business.

There are certain exceptions to the two year requirement when a change of employment, health, military service or other "unforeseen circumstances"

have occurred for the homeowner.

Homeowners must recognize gain on any portion of a residential property they don't use for residential purposes. Any depreciation taken after May 6, 1997 must be recognized in the year the primary residence is sold even if the homeowner qualifies for the 121 exclusion. This applies to periods of time when the property was used as a rental or for business.

This data is provided for information purposes only and should not be substitution for legal advice. Please consult a tax advisor or legal counsel.