IRC Section 121
Posted by Andy Gustafson on Thu, Jan 19, 2012
Internal Revenue Code (IRC) Section 121 provides each taxpayer filing a federal tax return an exclusion on capital gains tax when selling their primary residence. Every two years, $250,000 for those filing a single return and $500,000 for those married filing a joint return is provided given:
- The property represents their principal residence
- The taxpayer has lived in the home for at least two of the last five years.
Capital Gains Tax
When the selling price of a primary residence is greater than the original purchase price, a capital gains tax is imposed on the realized gain. The IRC Section 121 exclusion waives, eliminates or absorbs this tax when the realized gain is less than the $250,000/$500,000 exclusion. The IRC Section 121 exclusion is a gift from the United States government as an incentive to own a home.
IRC Section 121 Example
Jack and Ellen are married and have owned their home for the minimum two years. They bought the home for $175,000 and made $25,000 worth of repairs and improvements. They have contracted with a buyer to sell it for $325,000. What are the tax consequences?
| Original Purchase Price |
$175,000 |
| Plus Improvements |
$ 25,000 |
| Equals Adjusted Basis |
$200,000 |
| Sales Price |
$325,000 |
| Less Adjusted Basis |
$200,000 |
| Less Selling Expenses |
$ 15,000 |
| Equals Realized Gain |
$110,000 |
Given the realized gain is less than the $500,000 exclusion, there is no recognized gain or tax due on the sale. If the realized gain is above the exclusion, the federal long term capital gains rate would apply.
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