Tax Guides

Section 121 Exclusion Explained

Section 121 of the Internal Revenue Code allows a homeowner to exclude a significant amount of gain from the sale of a primary residence, and understanding its mechanics helps a Dallas, TX homeowner avoid confusing it with 1031 exchange rules that apply to investment property instead. The exclusion generally allows up to two hundred fifty thousand dollars of gain to be excluded for a single filer, and up to five hundred thousand dollars for a married couple filing jointly, provided the ownership and use test is satisfied, meaning the taxpayer generally owned and used the property as a primary residence for at least two of the five years immediately before the sale. The exclusion is generally available once every two years, and it does not require reinvestment in a new home, unlike the pre 1997 rollover rules that Section 121 replaced. For a property with mixed history, such as a home converted to a rental or a duplex where one unit was owner occupied and the other was rented, Revenue Procedure 2005 14 provides a framework for allocating gain between the Section 121 exclusion, applied to the residential portion, and Section 1031 exchange treatment, applied to the investment portion, provided each portion independently satisfies its own respective requirements. Texas has no state income tax, so gain above the exclusion amount is generally taxed only at the federal level. This page is general education, and taxpayers should confirm ownership and use test details and any mixed use allocation with a tax professional.