Deferring taxes on profits from sale of primary residence?

Question

I have a potential client who owns a home in Boulder that is their primary residence and it worth ~$1.3M and they have >$500K of equity in the property. They're wondering if they sell and put all of the proceeds of the sale into another primary residence, do they still have to pay taxes on the profits from the sale that exceed $500K? They  would utilize provision 121 and not pay taxes on the first $500K.

Account Closed · Answer

It sounds like your client is referring to the provisions of Section 121 of the Internal Revenue Code, which allows for the exclusion of up to $250,000 (or up to $500,000 for a married couple filing jointly) of capital gains on the sale of a primary residence. However, this exclusion is generally available only if the homeowner meets certain ownership and use requirements.

Here are some key points to consider:

• Ownership and Use Requirements:To qualify for the full $250,000 or $500,000 exclusion, the homeowner must have owned the home and used it as their primary residence for at least two of the five years preceding the sale.The ownership and use periods do not need to be consecutive, but they must total two years out of the last five.
• To qualify for the full $250,000 or $500,000 exclusion, the homeowner must have owned the home and used it as their primary residence for at least two of the five years preceding the sale.
• The ownership and use periods do not need to be consecutive, but they must total two years out of the last five.
• Capital Gains Exclusion Limits:If the homeowner meets the ownership and use requirements, they can exclude up to $250,000 of capital gains on the sale of their primary residence (or up to $500,000 for a married couple filing jointly).
• If the homeowner meets the ownership and use requirements, they can exclude up to $250,000 of capital gains on the sale of their primary residence (or up to $500,000 for a married couple filing jointly).
• Reinvestment in Another Primary Residence:If your client sells their current primary residence and purchases another home, they can potentially use the Section 121 exclusion again, provided they meet the ownership and use requirements for the new property.
• If your client sells their current primary residence and purchases another home, they can potentially use the Section 121 exclusion again, provided they meet the ownership and use requirements for the new property.
• Excess Gains Beyond Exclusion:Any capital gains beyond the $250,000 or $500,000 exclusion would generally be subject to capital gains tax.However, if the homeowner is 55 or older and meets certain other criteria, they may qualify for a one-time additional exclusion of up to $125,000.
• Any capital gains beyond the $250,000 or $500,000 exclusion would generally be subject to capital gains tax.
• However, if the homeowner is 55 or older and meets certain other criteria, they may qualify for a one-time additional exclusion of up to $125,000.

• To qualify for the full $250,000 or $500,000 exclusion, the homeowner must have owned the home and used it as their primary residence for at least two of the five years preceding the sale.
• The ownership and use periods do not need to be consecutive, but they must total two years out of the last five.

• If the homeowner meets the ownership and use requirements, they can exclude up to $250,000 of capital gains on the sale of their primary residence (or up to $500,000 for a married couple filing jointly).

• If your client sells their current primary residence and purchases another home, they can potentially use the Section 121 exclusion again, provided they meet the ownership and use requirements for the new property.

• Any capital gains beyond the $250,000 or $500,000 exclusion would generally be subject to capital gains tax.
• However, if the homeowner is 55 or older and meets certain other criteria, they may qualify for a one-time additional exclusion of up to $125,000.

It's crucial for your client to consult with a tax professional to assess their specific situation and ensure compliance with tax laws. Tax rules and regulations can be complex, and a professional can provide advice tailored to their circumstances, helping them make informed decisions about the sale of their primary residence and any potential reinvestment in another property.

Neil Smith · Answer

Super helpful! Thanks, Kislay.

Bill B. · Answer

The equity doesn’t matter, just the “profit”. (If they paid the property off they wouldn’t owe taxes on 1.3million.)

Take sales price minus selling costs ($100k in commissions?) minus purchase price minus capex spent. (New roof, counter tops, hvac, etc…). That’s your taxable amount.

If that number is over $500k The only way to avoid taxes on the amount over $500k would be to rent it out for a couple years (but less than 3 before you sell.) then you can take $500k sec 121 and do a 1031 exchange in to a rental for the amount over $500k.

But no, no way to save the taxes on purchase of another primary.

Deferring taxes on profits from sale of primary residence?

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