Section 121 Tax Exemptions

PRIMARY RESIDENCE

While many individuals buy their first homes for investment purposes, a primary residence still does not qualify for a 1031 Exchange as “investment property.” The IRS created Section 121 to provide a tax savings for people selling their primary residence.

Section 121 allows an individual to sell his/her residence and receive a tax exemption on $250,000 of the gain as an individual and $500,000 as a married couple. To be eligible for this tax savings, the home must be held as a primary residence for an aggregate of 2 of the preceding 5 years.

It is possible to combine both Section 121 and Section 1031 on a primary residence under specific circumstances. Examples of these circumstances include:

  • A working farm containing the farmer’s residence—the working farmland falls under Section 1031 and the farmer’s house falls under Section 121.
  • A duplex or similar plex with one unit being owner occupied (Section 121), the balance held as investment with tenants (Section 1031).
  • A residence (Section 121) containing a home office or land that could be partitioned (Section 1031).