Many property owners assume that Section 121 will fully protect them from taxes when they sell a home. David Moore, co-founder and CEO of Equity Advantage, raises an important question that challenges that assumption. Does the 250,000 or 500,000 exclusion really help people very much today?
Why Section 121 Often Falls Short Today
Section 121 was put in place in 1997 to allow homeowners to exclude a portion of their gain when they sell a primary residence. For most sellers, that means up to 250,000 of gain for a single filer or 500,000 for a married couple, as long as the property qualifies as their primary residence. While that number may have seemed generous in 1997, home values have increased dramatically since then. Today, appreciation alone can push gains well beyond the Section 121 limits for many long-time homeowners.
David Moore explains that this issue comes up often, even in conversations focused on 1031 Exchanges and DSTs. At first glance, talking about primary residences may seem out of place in an Exchange discussion. But in reality, many clients selling homes are dealing with gains far in excess of what Section 121 allows.
When that happens, property owners face a decision. They can sell and pay the tax, or they can look at whether part of the property qualifies for different tax treatment.
One Property, More Than One Asset
A key insight from David Moore is that many homes are not just one asset for tax purposes. In certain situations, a property sale can involve allocations between different uses of the same property.
One example is a home office. If a homeowner has been working out of their home and a portion of the property is treated as a home office, the sale may involve two different components. The primary residence portion may fall under Section 121, while the home office portion may be treated as an investment asset.
In that case, the transaction becomes a sale of one property with allocations. Part of the gain may qualify for the Section 121 exclusion, while another part may be eligible for a 1031 Exchange.
This is an important distinction. Rather than viewing a home as all or nothing, David Moore highlights how different portions of the same property can be treated differently under the tax code.
Duplexes and Mixed Use Properties
Another common example is a duplex where the owner lives in one half and rents out the other. In this situation, the portion used as a primary residence may qualify for Section 121. The rental portion may qualify for a 1031 Exchange.
David Moore also mentions acreage scenarios. If someone lives in a house on a larger piece of land, the house itself may be treated as a primary residence. The working land may be treated as investment property. Again, this creates an opportunity for allocation.
These scenarios show how Section 121 and a 1031 Exchange can work side by side within the same transaction, depending on how the property has been used.
Why This Matters in 1031 Exchange Planning
David Moore frequently emphasizes that real transactions rarely fit into neat categories. Many sellers are not just homeowners or just investors. They are often both at the same time.
Understanding how Section 121 interacts with a 1031 Exchange can open options that many people do not realize exist. Instead of assuming all gains are taxable once Section 121 is exceeded, it may be possible to defer taxes on the investment portion of the property.
The key takeaway from David Moore is not that everyone can or should use a 1031 Exchange after selling a home. It is that many people have more choices than they think. Those choices depend on how the property was used and how the sale is structured.
A Practical Perspective
Does 250,000 or 500,000 really help people very much today? For many long-time homeowners, the answer is no. Rising property values have changed the landscape and the rules have not kept pace.
However, understanding how Section 121 and a 1031 Exchange can apply to different portions of the same property can help you better evaluate your options and maximize tax benefits when selling your home.
If you are selling a property with mixed use or gains beyond Section 121 limits, contact Equity Advantage today to learn how a 1031 Exchange may fit into your planning.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
