Qualifying for the Section 121 Exclusion

You must meet certain criteria to qualify for a Section 121 Exclusion.

Primary Residence: You must have owned and used the home as your primary residence for at least two of the five years leading up to the sale date. The two years don’t have to be consecutive during the five years.

Frequency: You can only claim this exclusion once every two years.

Relevant Gains: The exclusion applies only to gains from your home’s sale, not losses. In addition, any portion of the profit exceeding the $250,000/$500,000 limit will be subject to capital gains tax.

Exceeding the Limit

If your profit exceeds the exclusion limit, you must pay capital gains tax on the amount above the limit. For example, if you are single and your profit is $300,000, $50,000 of that profit would be subject to tax. In that case, the amount you pay on the excess profit depends on your income and whether the gain is short-term or long-term. Long-term capital gains tax rates are generally lower than ordinary income tax rates.

Exclusion Exemptions

There are several exceptions to IRS home sale exclusion rules. These include giving the home to a spouse or ex-spouse, situations involving US military service members, or when the home sale is related to divorce, separation, or the death of a spouse.

In addition, if the home was ever subject to depreciation (i.e., used as a rental or home office deduction), then the depreciation previously claimed is subject to tax, even if the overall gain is below the Sec 121 exemption.

Partial Home Exclusions

If you don’t meet the eligibility test for the maximum home sale exclusion, you may still qualify for a partial exclusion. You can meet the requirements for a partial exclusion if the main reason for your home sale was a health issue, a change in work location, or an unforeseeable event.

Please contact your tax advisor and Tandem Wealth if you are considering selling your home so you can get a complete understanding of the tax impact on your portfolio.