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HOME SALE CAPITAL GAINS

Educational guide to how capital gains tax generally applies to a primary residence sale

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Selling a primary residence in the Las Vegas area is generally taxed differently than selling a rental or investment property, largely because of a federal exclusion built specifically for home sales. This is a general educational overview of how that exclusion generally works. It is not tax, legal, or investment advice, and any specific sale should be reviewed with a tax advisor.

The Section 121 Home Sale Exclusion

Homeowners who sell a primary residence generally may exclude up to two hundred fifty thousand dollars of gain if filing individually, or up to five hundred thousand dollars if filing jointly, from federal capital gains tax under Section 121, as long as the ownership and use tests are generally met. This exclusion generally applies only to a primary residence and generally does not extend to a rental property or a second home used mainly for personal enjoyment.

Ownership and Use Requirements

To generally qualify for the exclusion, the homeowner generally must have owned the property and used it as a primary residence for at least two of the five years immediately before the sale. These two years generally do not need to be continuous, and married couples generally only need one spouse to meet the ownership test while both generally need to meet the use test to claim the full five hundred thousand dollar exclusion.

When a Home Sale Does Not Qualify for the Full Exclusion

A home that was rented out for part of its ownership, used partly as a home office, or sold before the two year use requirement is generally met can generally produce a partial exclusion or no exclusion at all, and the depreciation claimed during any rental period is generally still subject to recapture even on an otherwise qualifying primary residence sale. These situations generally benefit from a closer review with a tax advisor before the sale closes.

How This Differs From Investment Property Rules

A 1031 exchange generally applies only to real property held for investment or business use, so a primary residence generally does not qualify for exchange treatment on its own. Investors in the Las Vegas market who convert a former primary residence into a rental generally need to establish investment use for a meaningful period before that property could generally be considered for a 1031 exchange, and the interaction between the Section 121 exclusion and any later exchange should generally be reviewed with a tax advisor.

A Las Vegas Homeowner Example

Consider a homeowner who purchased a house in a Summerlin neighborhood, lived in it as a primary residence for several years, and is now selling in a market where home values in the valley have generally appreciated. As long as the ownership and use tests are generally met, this homeowner generally can exclude a substantial portion of the gain from federal tax under Section 121, without needing to consider a 1031 exchange at all, since the exchange rules generally do not apply to a straightforward primary residence sale in the first place.

What Happens if the Home Was Rented Out First

A homeowner who rented out the Las Vegas property for a period before moving back in and selling it generally needs to account for that rental period separately, since depreciation claimed during the rental period is generally still subject to recapture even though the sale otherwise qualifies for the Section 121 exclusion on the personal use portion of the gain. This mixed use situation generally requires more careful calculation than a straightforward primary residence sale, and it should generally be reviewed with a tax advisor before the sale closes to confirm exactly how the exclusion and any recapture apply.

When a Home Sale Involves Both the Exclusion and a Partial Exchange

A homeowner who used part of a property for a home office or rented out a portion of the home, such as an accessory unit, while living in the rest as a primary residence generally may need to allocate the sale between the personal use portion, eligible for the Section 121 exclusion, and the business or rental use portion, which may separately be eligible for 1031 treatment under specific circumstances described in IRS guidance. This kind of mixed use allocation generally involves more complexity than either a straightforward primary residence sale or a straightforward investment property sale, and it should generally never be finalized without a tax advisor confirming the allocation in advance.

Frequently Asked Questions

HOME SALE CAPITAL GAINS FAQS

How much home sale gain can generally be excluded from tax?

Generally up to two hundred fifty thousand dollars for a single filer or five hundred thousand dollars for a married couple filing jointly, subject to the ownership and use tests.

Do the two years of ownership and use need to be consecutive?

Generally no. The two years out of the five years before the sale generally do not need to be continuous.

Does the home sale exclusion apply to a rental property?

Generally no. The Section 121 exclusion generally applies only to a primary residence, not to property held mainly for rental or investment purposes.

Can a former primary residence later qualify for a 1031 exchange?

Generally only after it has been converted to and held as investment or business use property for a meaningful period, which should generally be confirmed with a tax advisor.

Is depreciation recapture still owed on a primary residence that was partly rented?

Generally yes. Depreciation claimed during any rental use period is generally still subject to recapture even if the sale otherwise qualifies for the home sale exclusion.

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