As home values continue to rise, many homeowners find themselves sitting on substantial equity. What some may not realize is that this presents a unique opportunity for tax benefits, thanks to IRS Section 121. This provision allows eligible homeowners to exclude a significant portion of capital gains from the sale of their principal residence. Let’s look into the details of Section 121, its requirements, and how you can leverage it to maximize your home equity.
Understanding IRS Section 121: IRS Section 121 offers a valuable tax benefit for homeowners looking to sell their primary residence. Under this provision, married taxpayers filing jointly can exclude up to $500,000 of capital gains from the sale, while single filers or married individuals filing separately can exclude up to $250,000.
Requirements for Eligibility: To qualify for the benefits of Section 121, homeowners must meet certain criteria:
- Ownership and Use: The property must have been owned and used as the principal residence for at least two out of the last five years leading up to the sale.
- Exclusion History: Homeowners should not have excluded gain from the sale of another home within the two years preceding the current sale.
- 1031 Exchange: The property should not have been acquired through a 1031 exchange within the past five years.
Calculating Capital Gains: Capital gains are calculated by subtracting the property’s basis (purchase price plus capital improvements) from the selling price, minus any sales costs. Gains exceeding the exclusion amounts are subject to capital gains tax, which varies from 0% to 20% based on the taxpayer’s adjusted gross income in the year of the sale.
Exceptions and Considerations: Certain exceptions may apply, such as in cases of divorce, death of a spouse, or military service. It’s essential to consult IRS Publication 523 and seek advice from a tax professional to understand your specific situation thoroughly.
Maximizing Benefits: By understanding the nuances of IRS Section 121, homeowners can maximize their tax benefits when selling their primary residence. Planning ahead, ensuring compliance with eligibility requirements, and seeking professional guidance can help optimize savings and make the most of your home equity.
It’s crucial for homeowners to explore all available avenues for maximizing their assets. IRS Section 121 offers a valuable opportunity to exclude significant capital gains from the sale of a primary residence, providing a substantial tax benefit. By understanding the requirements, calculating capital gains accurately, and seeking expert advice, homeowners can leverage this provision to unlock the full potential of their home equity.
Some exceptions for divorce, death of a spouse, or military service may apply. For more information, see IRS Publication 523 and download our Homeowners Tax Guide. It is always advisable to seek the counsel of your tax professional for your particular situation.
If you’re considering a move or investment and require a trusted Real Estate Broker, we’re here to assist you. Contact us via email at TEAM@McDanielCallahan.com, complete the form below, or give us a call at 925-838-4300. We are ready to provide expert guidance and support for all your real estate needs. Terry McDaniel DRE License #00941526
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