what about Section 121 is so special?

Question

I'm trying to understand what the big deal is? As I understand it, you save capital gains on $250k for single, $500k for married when you sell the house you lived in so long as you lived in 2 of the previous 5 years. Ok, tax savings, yay.....and? My question is: doesnt that mean that everyone who sells a house they live in is doing this? I've read about this idea like it was some sweet deal (tax savings is great yes) but I am missing what is so special (how others make it seem) or does every home owner who ends up selling use this and it isnt special but actually typical? Are there more stipulations? Can I build a house, live in it for two years and sell it using section 121 to save taxes? Does the house have to be already built? Can I buy a house that needs some rehab, upgrade it while living there and save on the taxes of the higher value?

I apologize for posting this if it has been covered but I find the search function on this site incredibly lacking. I searched on 'section 121' and got 10 pages of section 8 posts. I read the article that mentions 121 some but it didnt really address my above questions. Thanks for reading and replying.

I apologize for posting this if it has been covered but I find the search function on this site incredibly lacking.  I searched on 'section 121' and got 10 pages of section 8 posts.  I read the article that mentions 121 some but it didnt really address my above questions.  Thanks for reading and replying.

Jay Hinrichs · Answer

@Mindy Jensen  is the 121  queen I myself have done it 6 times since I bought my first home in 77.. and will do it one more time before I call it quits.. now I was fortunate that all of them were in the SF bay area and 2 were in Portland.. so I have literally made millions tax free..

the specialness of this is unlike when you own rentals there is no recapture and huge penalty when you sell.. you sell get your gain tax free no recapture its by far the best treatment in the US real estate tax code in my mind other than or equal to 1031 if your goal is to roll up and give to heirs at stepped up basis.

but yes many builders have done this over the years.

and yes you can value add you can do what ever it just has to be your primary and live there 2 of 5 years.. they darn near changed it to 4 years in the new tax code but it got bounced last minute and remained the same..

so in my humble opinion yes its common and maybe a lot of folks don't know it.. but it is truly special and sure has treated me well personally.

now if you live in an area were there is limited to no appreciation its not really a factor..

if you bought a home for 120k and sold it 15 years later for 160k  well not going to make a huge difference

but for those in areas like

CA  WA OR  Austin parts of Chicago Boston DC  Miami Charleston etc etc its HUGE>

Jay Hinrichs · Answer

Account Closed  what your missing is I sold Palo Alto to move to Napa  cheaper in napa by Half lifestyle for me better by 100% :)  ( Silverado country club Vs Barron Park )

then I sold Napa and moved to Canada for a year bought a home 1/3 the price.. that only lasted for less than a year so I don't count Canada but then bought Portland for much less.. that one sky rocketed then I moved into one of my townhouses.. waited.. then moved into a new build in Portland that went way up..  and now I am going to sell Pdx and I have already bought vegas for 1/4 of what PDX is worth so massive equity in PDX of which 500k will be tax free when I move.. these are all over occ has nothing to do with business.. and its just my personal journey others will be different of course.

so your right if your only moving to more expensive homes your still burning all the cash..

but for those that may do the flight from CA you take 500k tax free with you  :)  Or builders as we were discussing.. they pocket the tax free then use minimum down to buy the next project..

Chris Mason · Answer

My wife's response to leaving the furniture that fits/matches the house in place and converting it to a furnished rental was "omg we get to buy all new furniture again?!"

Dave Foster · Answer

@Daniel Thomas, It's all part of your strategy and quite honestly a lot of folks don't think strategically through all sides of the issues.  And there is no form to fill out.  You either qualify and your accountant takes it out of your taxable income or you don't.  So while it's critically strategically it also just sort of happens accidentally without a lot of planning or forethought.

Yes it's a very common builder strategy -

1. build two and move into one.  Sell the other and pay ordinary income taxes to provide income and seed for the next build.

2. Once complete in two years sell the first one tax free.  Move into one of the new builds and sell the other one and pay ordinary income taxes to provide income and seed for the next build.

3. etc etc

@Jay Hinrichs, I had friends who did this and asked the wife how she handled it.  Her reply was that when it was time to remodel they just moved instead!

I'm working on my 6th.  But Jay is so much older than I :)

Point is if you even do it once or twice and shelter 300K in taxes that's easily $50K of taxes.  And invested at 10% that is $5K/year in your pocket just because of sec 121.  When the tool is there and so easy to use....why not???

Mohamed Nagoor · Answer

@ Daniel Thomas. Short answer is YES to all your questions. Go for it and enjoy the tax break!

Daniel Thomas · Answer

Well said Dave. I think when I read about it the idea seemed so easy that surely I was missing something. Thx for the info. Regardless of how I choose my first move I’d be a fool to not use section 121.

Jay Hinrichs · Answer

@Dave Foster  its been kind to me.

PS on my Land deal in CA I just countered the developer with a close all on the same date.. no sense getting the 800k  then paying tax on 2 million when you can just wait 6 months and then 1031 the whole amount.. with a 27k basis  ( what we paid for it mid 90s) tax would be quite high being in CA.

thanks for the advice talk to you if it becomes real..

Jay Hinrichs · Answer

@Daniel Thomas  like I said very common for builders to build live in it 2 to 3 years then do it again and do that their whole career.. IF the wife will let them !!

Daniel Thomas · Answer

Thanks sir, I live in Omaha so appreciation isnt that great but I've recently come across this idea as a way to maximize profit if I decide to build, live, and sell a SFH.  Will try to do it in West Omaha where the property values are steadily increasing as the area is becoming very desirable.  Thanks for the input.

Russ Draper · Answer

As I understand it, it is as you described. You don't pay taxes on the gains of your primary residence if you lived there for 2+ years ($250k single $500k married).  So for example when I sold my last house it had appreciated in value over $200k and I didn't have to pay taxes on the gain, I just rolled it into the next house.  I don't believe the terms of how you got the house matter, nor does it matter if you did a rehab on it just that you lived there over 2 years. In some cases I believe multifamilies can also have this rule applied to them but IANAL, YMMV, etc.

what about Section 121 is so special?

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