121 tax exemption questions

9 Replies

I've searched the internet & bp but didn't find the specific answers. I understand the 250k exemption for a single filer. My questions are can rehab costs be included with the purchase cost of the next home? Materials & labor? Does it have to be contracted out or can it be done in house? The time frame to purchase the next house? 1 year from time of sale? Or is it within the calendar year. Any other gotchas to look out for? TIA

"IRC section 121 allows a taxpayer to exclude up to $250,000 ($500,000 for certain taxpayers who file a joint return) of the gain from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale."

I think you're mixing this up with a IRC 1031 exchange which is when you sell a property and can roll those proceeds into the purchase of a new property to defer your capital gain/depreciation recapture taxes.

Hi Marc, thanks for the reply. No it's for a primary residence. FWIW single, selling 750k primary residence & can only keep 250k. Does the new residence have to be 500k (or more) or could I buy one for 400k & put a 100k into it? Time frame to buy next residence? Thanks 

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@Alan F. @Alan F. you're looking at this like it operates the same as a 1031 where you buy a replacement property. Section 121 is better all you do is sell your current residence and keep the gain with no taxes owed, that's it. 

So let's say you buy a home for $450K, and you sell 2 years later for $700K. The $250K gain is 100% tax free that's it, there's nothing new to buy there's no minimum or maximum you could spend on a new primary residence. So you don't have to consider the items you're asking about for the 121 exclusion to apply.

Thanks Matt, so if I bought at 200k sold at 750k, 250k is exempt from capital gains & I didn't buy another residence would the 300k delta be taxed as  capital gains?

@Alan F. Eligibility for a 121 primary residence sale is if you lived in the property for 2 out of the 5 years prior to selling.  If you meet that the first 250K of profit (if you're single) is tax free.  No need to reinvest at all.  Eligibility for a 1031 is that it must be used for investment when you sell.  Then you can sell and defer the gain by doing the 1031.  When you do a 1031 you have 45 days to identify your replacements and 180 days to close.

So, if you lived in the property and then moved out for a year or two and rented it then your property would be eligible for both a 121 exemption and a 1031 exchange.

If you are living in the property now it does not qualify for the 1031 exchange part.

For the 121 exclusion you don't need to buy a new home. That's not a requriement at all. 

If you bought at $200k  and sell at $750k you have $550k of gain. 

This will be reduced by: 

Costs you spend renovating your house- you can include all material costs and any paid labor (but can't include a cost of your time)

Selling costs on the sale of the house

If you're married you can exclude $500k of that $550k gain 

If you're single or MFS you can exclude $250k 

That's assuming you both owned and occupeid it for 24 months out of the last 5 years. That's all that's required. 

The remaining gain above that is taxable regarldess of how the proceeds are utilized. 

Thanks so much Natalie, there's alot of cpa"s that have this confused, I really appreciate your wording.

Originally posted by @Alan F. :

Thanks so much Natalie, there's alot of cpa"s that have this confused, I really appreciate your wording.

 There definitely are. I try to explain things in normal- people terms because tax is just a munch of jibberish. 

@Alan F.

Section 121 exclusion allows you to exclude $250,000 of gain($500,000 if MFJ) if you owned and lived in the home for 2 out of the last 5 years.

There are no requirements as to what you do with the proceeds of the sale.