Reality check: you don’t need to own your home to get many of the benefits real-estate ownership offers. You can buy a rental property—as opposed to a primary residence—and still get property appreciation as well as tax benefits and, on top of that, rent money. But, there are still benefits to homeownership, and one huge one, that hardly anyone is talking about, is Internal Revenue Code Section 121.
Section 121 exempts homeowners from paying capital gains tax on the sale of their principal residence. Single people can be exempt on a gain of up to $250,000, and some married couples on up to $500,000.
This is a huge deal. Let’s put it into context.
If you buy a car and you sell it at a profit, you’re paying taxes. You buy stocks; sell them at a profit—you’re paying taxes. You buy almost anything; sell it at a profit—you’re paying taxes. Now, if you buy a house to live in, and you sell it for a $500,000 profit, under Section 121, you are not paying capital gains tax.
In California—accounting for federal and state taxes, your income bracket, and a multitude of other factors—Section 121 could save homeowners over $100,000 in taxes. That’s $100,000 more in your pocket after selling your home that could go toward retirement, investments, and fun.
Section 121 could very well be the biggest tax break that most people can get their hands on. It has the potential to put the tax benefits of many 401(k) retirement plans to shame.
To qualify, you must have owned and lived in the property for at least two of the last five years immediately prior to the sell. Also, you can only claim the exemption once every two years.
So, while you don’t have to own your home to get many of the benefits of real-estate ownership there are still benefits exclusive to homeownership—and a huge one is the Internal Revenue Code Section 121 tax break.
Disclaimer: I am not qualified in professional in the area of taxes. This is a quick and chopped up summary of IRC 121 that needs to be consulted with the appropriate professional before any action is take. For more information, directly from the IRS, visit: https://www.irs.gov/publications/p523
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ABOUT THE WRITER
Daniel is a real estate agent, specializing in residential and residential income properties. He'd love to help you.