FAQ: Section 121 Exclusion

What is the Section 121 Exclusion?

The Section 121 Exclusion allows homeowners to exclude up to 250,000ofcapitalgains(250,000ofcapitalgains(500,000 for married couples filing jointly) from the sale of their primary residence, provided certain ownership and use requirements are met.

Who qualifies for the Section 121 Exclusion?

To qualify, you must have owned and used the home as your primary residence for at least two out of the last five years before the sale. The two years do not need to be consecutive.

How much gain can I exclude under Section 121?

Single filers can exclude up to 250,000 of capital gains, while married couples filing jointly can exclude up to 250,000 of capital gains, while married couples filing jointly can exclude up to 500,000.

Can I use the Section 121 Exclusion more than once?

Yes, you can use the exclusion multiple times, but you can only claim it once every two years. There are exceptions for certain circumstances, such as job relocation or health issues.

What if I don’t meet the two-year ownership and use requirements?

If you don’t meet the two-year requirement, you may still qualify for a partial exclusion if the sale was due to unforeseen circumstances, such as a job change, health issues, or other qualifying events.

Does the Section 121 Exclusion apply to second homes or rental properties?

No, the exclusion only applies to your primary residence. However, if you used a portion of the home as a rental or second home, you may still qualify for a partial exclusion.

What if I used part of my home for business or rental purposes?

If you used part of your home for business or rental purposes, the exclusion may not apply to the portion of the gain allocated to that use. You may need to depreciate the business or rental portion, which could affect the exclusion.

Can I claim the Section 121 Exclusion if I inherited the home?

If you inherited the home and used it as your primary residence for at least two years, you may qualify for the exclusion. However, the exclusion amount may be limited depending on the circumstances.

What if I sell my home at a loss?

The Section 121 Exclusion applies only to capital gains. If you sell your home at a loss, the exclusion does not apply, and you generally cannot deduct the loss on your taxes.

Can I exclude gains from the sale of a mobile home or houseboat?

Yes, as long as the mobile home or houseboat qualifies as your primary residence and meets the ownership and use requirements.

What if I am divorced or separated?

If you are divorced or separated, you may still qualify for the exclusion if you meet the ownership and use requirements. If you are married, only one spouse needs to meet the ownership requirement, but both must meet the use requirement to claim the $500,000 exclusion.

Can I claim the Section 121 Exclusion if I rented out my home?

If you rented out your home but still used it as your primary residence for at least two of the last five years, you may still qualify for the exclusion. However, any depreciation claimed during the rental period may be subject to recapture.

What if I sold my home due to a job relocation?

If you sold your home due to a job relocation and did not meet the two-year requirement, you may qualify for a partial exclusion under the "unforeseen circumstances" rule.

What if I sold my home due to health issues?

If health issues forced you to sell your home before meeting the two-year requirement, you may qualify for a partial exclusion under the "unforeseen circumstances" rule.

Can I claim the Section 121 Exclusion if I am a widow or widower?

Yes, if you are a widow or widower and meet the ownership and use requirements, you can claim the 250,000 exclusion. If you sell the home with in two years of your spouse’s death, you may still qualify for the 250,000 exclusion. If you sell the home within two years of your spouse’s death, you may still qualify for the 500,000 exclusion if you file jointly for the year of the sale.

What if I co-own the home with someone who is not my spouse?

If you co-own the home with someone who is not your spouse, each owner may be eligible for their own $250,000 exclusion, provided they meet the ownership and use requirements.

Can I claim the Section 121 Exclusion if I am in the military?

Military personnel may qualify for an extended time period to meet the two-year use requirement if they were on qualified official extended duty during the five-year period before the sale.

What if I sold my home and moved into a nursing home?

If you sold your home and moved into a nursing home, you may still qualify for the exclusion if you owned and used the home as your primary residence for at least one year during the five-year period before the sale.

What if I sold my home and bought a new one?

The Section 121 Exclusion applies to the sale of your primary residence, regardless of whether you purchase a new home. You do not need to reinvest the proceeds to qualify for the exclusion.

What records do I need to keep for the Section 121 Exclusion?

You should keep records of the purchase and sale of your home, including closing documents, proof of ownership, and evidence that the home was your primary residence (e.g., utility bills, tax returns, or voter registration).