Chris, thank you so much for this well thought out and clear video! Definitely helped me understand the confusing Section 121 exclusion. Just wanted to ask a few quick scenario question that have been on my mind. For example me and my wife just got married this year, but she purchased a house three years ago. The first year of ownership we waited for contractors to finish their renovations before moving in, so we have been living in the house for the past two years. We are thinking of selling our house and down sizing. Since my wife has technically owned the house for three years and have paid mortgage on it for three years even during the one year of renovations, would we would still fit into the 121 exemption because we have technically owned and not rented the residence for 3 years? Also, we are not sure yet on what the fair assessed market value is on the house is yet, but our net profit from our house teeters between the 250k single filer threshold, but since we are newly married as of this year, can we apply jointly and fit into the 500k threshold? Thanks again for your advice and valuable information!
Good question! I'll do my best to explain my thinking. According to the IRS (links below): - "In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test....two years out of the five years prior to its date of sale." - "For a married couple filing jointly, only one spouse has to meet the *ownership* requirement." - "Unlike the ownership requirement, each spouse must meet the *residence* requirement individually for a married couple filing jointly to get the full exclusion." It sounds like while unmarried, your WIFE met the ownership requirement. It sounds like through a combination of unmarried and married, your WIFE met the residence requirement. | *Million-dollar question* ...did you meet the residence requirement? Did you list this property as your PRIMARY residence for the past 2 years? If so, then it sounds like you two qualify for the exemption. If not, you'll want to stay there until 24 months of "residence" exists for you, then it sounds like you would qualify for the $500k exclusion. I would advise hiring a CPA to provide the "insurance" on your plan as it could save you $40k in taxes. I cannot provide "tax advice" nor am I qualified to interpret IRS statutes. Hope that helps! IRS -> www.irs.gov/taxtopics/tc701 IRS -> www.irs.gov/publications/p523#en_US_2022_publink100011878
Thank you. Since you mentioned a more nuanced video on rental or investment property capital gains, when will you or do you already have a video on that? It’s difficult to find videos on the 121 exclusion with regard to rental properties that were never lived in as a Primary residence. However, I want to move back into three of my rental properties and to use each of them as my primary Residence. Information about doing this seems a little confusing and mixed. There’s a lot of clear information about primary residence 121 exclusion. Thank you very much.
I totally understand the frustration with lack of good quality education content on this topic, but I am not quite sure I understand your question. Are you asking how to apply the Section 121 exclusion to the sale of your rentals? It would appear the IRS needs you to satisfy the ownership and use rules for a primary residence in order to take advantage of this special tax treatment (aka you would do this successively for all the properties). You can only have one primary residence at a time so again, you'd need to do this successively. IRS Article -> www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/sales-trades-exchanges/sales-trades-exchanges-3 Does this address your question? *there may be more sophisticated strategies that I am unaware of and of course am not a CPA (and therefore must always speaking with your tax professional).
@@chrisdime Thank you. Yes. To some extent you've helped answer. Much appreciated. I realize it's complex. I'm making an appointment with a real estate tax attorney. I wish there were seminars and certifications to take on this subject. I want to understand the more exotic tax strategies.
These exemption limits are ABSURDLY out-of-date ($250K/$500K) given real estate value gains, and sharp overall inflation increases, in the last few years. Particularly if you're in just about every metro area in the U.S, and ESPECIALLY if you're unmarried. Why the marital-status discrimination?? These exemptions should be DOUBLED immediately..and adjusted for inflation, annualy; every year thereafter..perpetually.
Totally hear you. As you probably know, I don't think the agencies that collect taxes have much incentive to do this, however. For example, WA State's Estate Tax Exclusion amount has gone up by $200k (from $2M to $2.2M) over the past 18 years.
Chris, thank you so much for this well thought out and clear video! Definitely helped me understand the confusing Section 121 exclusion. Just wanted to ask a few quick scenario question that have been on my mind. For example me and my wife just got married this year, but she purchased a house three years ago. The first year of ownership we waited for contractors to finish their renovations before moving in, so we have been living in the house for the past two years. We are thinking of selling our house and down sizing. Since my wife has technically owned the house for three years and have paid mortgage on it for three years even during the one year of renovations, would we would still fit into the 121 exemption because we have technically owned and not rented the residence for 3 years? Also, we are not sure yet on what the fair assessed market value is on the house is yet, but our net profit from our house teeters between the 250k single filer threshold, but since we are newly married as of this year, can we apply jointly and fit into the 500k threshold? Thanks again for your advice and valuable information!
Good question! I'll do my best to explain my thinking.
According to the IRS (links below):
- "In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test....two years out of the five years prior to its date of sale."
- "For a married couple filing jointly, only one spouse has to meet the *ownership* requirement."
- "Unlike the ownership requirement, each spouse must meet the *residence* requirement individually for a married couple filing jointly to get the full exclusion."
It sounds like while unmarried, your WIFE met the ownership requirement.
It sounds like through a combination of unmarried and married, your WIFE met the residence requirement. |
*Million-dollar question* ...did you meet the residence requirement? Did you list this property as your PRIMARY residence for the past 2 years? If so, then it sounds like you two qualify for the exemption. If not, you'll want to stay there until 24 months of "residence" exists for you, then it sounds like you would qualify for the $500k exclusion.
I would advise hiring a CPA to provide the "insurance" on your plan as it could save you $40k in taxes. I cannot provide "tax advice" nor am I qualified to interpret IRS statutes.
Hope that helps!
IRS -> www.irs.gov/taxtopics/tc701
IRS -> www.irs.gov/publications/p523#en_US_2022_publink100011878
Thank you. Since you mentioned a more nuanced video on rental or investment property capital gains, when will you or do you already have a video on that? It’s difficult to find videos on the 121 exclusion with regard to rental properties that were never lived in as a Primary residence. However, I want to move back into three of my rental properties and to use each of them as my primary Residence. Information about doing this seems a little confusing and mixed. There’s a lot of clear information about primary residence 121 exclusion. Thank you very much.
I totally understand the frustration with lack of good quality education content on this topic, but I am not quite sure I understand your question.
Are you asking how to apply the Section 121 exclusion to the sale of your rentals? It would appear the IRS needs you to satisfy the ownership and use rules for a primary residence in order to take advantage of this special tax treatment (aka you would do this successively for all the properties).
You can only have one primary residence at a time so again, you'd need to do this successively.
IRS Article -> www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/sales-trades-exchanges/sales-trades-exchanges-3
Does this address your question?
*there may be more sophisticated strategies that I am unaware of and of course am not a CPA (and therefore must always speaking with your tax professional).
@@chrisdime Thank you. Yes. To some extent you've helped answer. Much appreciated. I realize it's complex. I'm making an appointment with a real estate tax attorney. I wish there were seminars and certifications to take on this subject. I want to understand the more exotic tax strategies.
great info
These exemption limits are ABSURDLY out-of-date ($250K/$500K) given real estate value gains, and sharp overall inflation increases, in the last few years. Particularly if you're in just about every metro area in the U.S, and ESPECIALLY if you're unmarried. Why the marital-status discrimination?? These exemptions should be DOUBLED immediately..and adjusted for inflation, annualy; every year thereafter..perpetually.
Totally hear you. As you probably know, I don't think the agencies that collect taxes have much incentive to do this, however.
For example, WA State's Estate Tax Exclusion amount has gone up by $200k (from $2M to $2.2M) over the past 18 years.