However, there is a way to avoid taxes on the sale of a personal residence in the form of IRC section 121.
This allows a taxpayer to exclude $250,000 ($500,000 if married) in gain on the sale of a personal residence.
In order to qualify the property must have been used as a principal residence at least 2 of the last 5 years, and the taxpayer can only claim one exclusion every two years. The gain is permanently excluded, not deferred and there is no need to purchase a replacement home.
If a property is partly used as a personal residence and partly as investment property, like a duplex where half is rented out, then an investor can take advantage of both IRC 121 and a 1031 exchange.
Here’s what’s involved…
Combined 121 exclusions and 1031 exchanges are more complex than a typical 1031 exchange.
As always, an investor should work with their legal, investment, and tax advisors before beginning one.
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