Under Section 121 provision, individuals or married couples filing jointly can exclude up to a certain amount of capital gains from their taxable income when selling their home. To qualify for the Section 121 exclusion, homeowners must meet the following criteria:
- The homeowner must have owned and used the property as their primary residence for at least two out of the five years preceding the sale. These two years do not have to be consecutive.
- The Section 121 exclusion can generally be claimed only once every two years. However, certain exceptions may apply in cases of unforeseen circumstances, such as a change in employment or health.
- The maximum amount of capital gains that can be excluded under Section 121 is determined based on filing status. For individuals, the maximum exclusion is $250,000, and for married couples filing jointly, it is $500,000.
Section 121 Exclusion and 1031 Exchange
It’s important to note that the Section 121 exclusion is specific to the sale of a primary residence. If you are considering a 1031 exchange, which allows for the deferral of capital gains taxes on the sale of investment or business property, it does not apply to the Section 121 exclusion.
A 1031 exchange, governed by Section 1031 of the Internal Revenue Code, enables taxpayers to defer capital gains taxes by reinvesting the proceeds from the sale of one investment property into another like-kind property. While it provides a tax deferral benefit, it does not offer the same exclusion of capital gains as Section 121.
If you have utilized the Section 121 exclusion in the past, it may impact your ability to qualify for a 1031 exchange. To qualify for a 1031 exchange, the property being sold must meet specific requirements, including being held for business or investment purposes. Therefore, it’s essential to consult with a qualified tax professional or advisor to understand the implications and navigate the complexities of both provisions effectively.
The Section 121 exclusion provides homeowners with a valuable tax benefit, allowing them to exclude a portion of capital gains from the sale of their primary residence from their taxable income. However, it’s crucial to understand that the Section 121 exclusion is separate from the 1031 exchange, which is specifically for investment or business properties. We suggest you seek professional guidance on Section 121 exclusion to maximize the benefits and comply with tax regulations.