Homeowners thinking of selling their homes have a lot of things to consider, including the amount of capital gains tax they may have to pay. Fortunately, a tax provision known as the “Section 121 Exclusion” can help homeowners save on taxes following a home sale.
In simple terms, this capital gains tax exclusion enables homeowners who meet specific requirements to exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of capital gains from the sale of their primary residence. If you sell your home for an increase of less than $250,000 (or $500,000 if you are married and filing jointly), you will not have to pay capital gains tax on that amount.
There are specific criteria that homeowners must meet, including owning and using the home as their primary residence for at least two of the five years leading up to the date of the sale. Homeowners can only claim this exclusion once every two years, which only applies to gains from the home’s sale, not losses.
However, there are several exceptions to the 121 exclusion rules. For example, if you transfer a home to a spouse or ex-spouse, the IRS doesn’t consider that a gain or a loss. Other exceptions to the rules apply in situations involving U.S. military service members or where the primary home sale is a factor in separation, divorce, or death of a spouse.
If a homeowner’s profit exceeds the exclusion limit, they must pay capital gains tax on the amount surpassing it. It’s essential to keep detailed records of the home sale, including the purchase price, any improvements made to the property, and expenses, to accurately calculate capital gains and determine if they qualify for the exclusion.
Financial experts say that if a homeowner doesn’t meet the maximum home sale exclusion requirements, they may still qualify for a partial exclusion of gain. For example, they can meet the criteria for a partial exclusion if the main reason for their home sale was a change in workplace location, a health issue, or an unforeseeable event.
In any case, it’s essential to consider state or local taxes that may apply to the home’s sale. Consulting with a tax professional is a good idea if a homeowner needs clarification on their eligibility or help navigating the complexities of tax laws. They can provide personalized advice based on their situation and ensure they take full advantage of tax benefits.
By taking advantage of the Section 121 Exclusion, homeowners can save thousands of dollars in capital gains tax. Remember that this tax provision is not well-known, and many homeowners may miss out on this valuable tax-saving tool.
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