1021 Exclusion
Under Internal Revenue Code (“IRC”) §121, individual taxpayers may exclude up to $250,000 of capital gain from the sale of a primary residence ($500,000 for married couples filing jointly), provided they meet the ownership and use tests. This exemption allows homeowners to realize substantial tax savings when selling their principal residence. However, eligibility depends on strict IRS rules involving occupancy, timing, and intent.
SERVICES
ELIGIBILITY & OWNERSHIP REQUIREMENTS
To qualify for the §121 exclusion, the taxpayer must have owned and occupied the home as a primary residence for at least two of the five years preceding the sale. Partial exclusions may apply in cases involving relocation, health issues, or unforeseen circumstances. Proper documentation and timing are essential to preserve eligibility.
MARITAL STATUS & JOINT OWNERSHIP CONSIDERATIONS
Married couples can exclude up to $500,000 in capital gains if specific conditions are met — both spouses must have used the home as a primary residence, and at least one must meet the ownership requirement. Divorces, separations, or estate transfers can complicate eligibility and require strategic planning.
PARTIAL EXCLUSIONS & HARDSHIP EXCEPTIONS
When unforeseen circumstances force the sale of a primary residence before meeting the full ownership and use tests, the IRS allows a partial exclusion proportional to the time the property was used as a primary home. Qualifying situations may include job relocation, health-related moves, or unexpected financial hardship.
CONVERSION BETWEEN INVESTMENT & PRIMARY RESIDENCE
Homes converted from rental or investment use to primary residences (or vice versa) require careful tax analysis. Gains attributed to non-qualified use — periods when the property was rented or held as an investment — may be taxable even if the home later becomes a primary residence.
COORDINATION WITH 1031 EXCHANGES
Section 121 and Section 1031 can sometimes work together, such as when a taxpayer converts a former rental property acquired through a 1031 exchange into a primary residence. Special holding requirements and allocation rules determine how much gain can be excluded.
ESTATE & LONG-TERM PLANNING CONSIDERATIONS
The §121 exclusion can play an important role in estate planning and wealth preservation. Coordinating the timing of sales, ownership transfers, and step-up in basis upon death can result in substantial tax savings for heirs and beneficiaries.
