CA’s section 121 exclusion explained

Among the tax benefits that are available from the IRS to California homeowners, one of the most useful is the Section 121 Exclusion which allows homeowners to exclude from their taxable income a gain up to $250,000 from the sale of their main home. Couples that file joint returns get to exclude a gain up to $500,000.

The Section 121 Exclusion allows individuals who sell their primary residences to put the proceeds from the sale into purchasing another home without having to pay taxes on the gain. However, there is no requirement that the proceeds from the sale must be used to purchase another house in order for an individual or couple to claim the exclusion.

In order to claim the exclusion, the homeowner(s) has to have owned the home in question and used it as a primary residence for at least two out of the five previous years. While the 5-year period ends on the date the house is sold, the 2 years do not have to be consecutive.

Plan ahead

In order to take advantage of Section 121 Exclusion and to significantly save on taxes, you have to be living in the house for two out of the five years before you sell it. It cannot be utilized as real estate investment property, a second or vacation home, or a business property. 

Renting your house is not allowed if you want to claim the exclusion. In addition, the exclusion is also available once every two years in order to prevent abusive tax avoidance. 

There are exceptions in how the Section 121 Exclusion is applied with regards to various scenarios involving nonqualified use. For instance, if only a portion of your property qualifies as your main home, you will complete a special form to certify an exemption on the portion not used as your personal residence. Other exemptions apply in cases of poor health, job changes, military deployments, economic hardship, or unforeseen circumstances.

Getting the tax advice you need

To ensure you’re getting all the credits, exemptions and deductions you’re entitled to, consult a tax professional. In addition, a California expert CPA can give you tips on money-saving tax moves, qualifying for  Section 121 Exclusion correctly, and when the best time to sell your home is.

As a CPA for individuals in CA, GYL is at the top of the list. Their firm provides a full range of accounting and tax services for individuals, the goal of which is to help you keep more of your hard earned money in your pocket. With offices located in Ontario and San Diego, let their team provide you with initiative-taking tax planning and preparation.