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 

Promotion
Contracoin
Bridging between Crypto and Real Estate
Get ready to buy your next property using Crypto
Using crypto to own property, leverage #CTCN in buying your next home and more
Time to buy property

@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.