121 Exclusion
Definition:
The 121 exclusion, also known as the primary residence exclusion, allows homeowners to exclude up to $250,000 of capital gains ($500,000 for married couples filing jointly) from the sale of their primary residence from federal income tax, provided specific ownership and use requirements are met.
121 Exclusion Information
Under Internal Revenue Code Section 121, a taxpayer may qualify for this exclusion if they have owned and used the property as their principal residence for at least two of the five years preceding the sale. The exclusion can be used once every two years and applies only to the gain realized on the sale of a qualifying home.
Partial exclusions may apply if the sale was due to unforeseen circumstances such as job relocation, health reasons, or other qualifying events. The exclusion applies to capital gains only, meaning any depreciation claimed on the property (such as for a home office or rental use) must be recaptured and taxed separately.
Florida Legal Definition
In Florida, the 121 exclusion follows federal law since Florida does not impose a state income tax. Florida residents benefit from the same capital gains exclusion under Section 121 of the Internal Revenue Code. This exclusion is particularly valuable for homeowners selling appreciated property in Florida’s real estate market.
While Florida has no separate income tax implications, property owners must still comply with federal eligibility requirements, including ownership, use, and timing tests, to qualify for the exclusion. The exclusion applies whether or not the property is located within Florida, as long as the taxpayer meets the federal criteria.
How It’s Used in Practice
In practice, the 121 exclusion is commonly used by homeowners selling their primary residence to reduce or eliminate federal capital gains taxes. Taxpayers ensure eligibility by maintaining documentation that proves ownership and occupancy, such as utility bills, mortgage records, or tax filings. Real estate agents and tax professionals often advise clients on how to structure sales or time moves to meet the two-out-of-five-year test. In cases where the property was partially rented or used for business, professionals help calculate the taxable portion of the gain and depreciation recapture.
Key Takeaways
- The 121 exclusion allows taxpayers to exclude up to $250,000 ($500,000 for married couples) of gain from the sale of a primary residence.
- To qualify, the home must have been owned and used as the taxpayer’s main residence for at least two of the previous five years.
- Partial exclusions are available for sales due to health, job relocation, or unforeseen circumstances.
- Florida residents benefit fully from the federal exclusion since Florida has no state income tax.
- Proper documentation and compliance with IRS rules are essential to claim the exclusion successfully.
Disclaimer: The information and opinions provided are for general educational, informational or entertainment purposes only and should not be construed as legal advice or a substitute for consultation with a qualified attorney. Any information that you read does not create an attorney–client relationship with Barnes Walker, Goethe, Perron & Shea, PLLC, or any of its attorneys. Because laws, regulations, and court interpretations may change over time, the definitions and explanations provided here may not reflect the most current legal standards. The application of law varies depending on your particular facts and jurisdiction. For advice regarding your specific situation, please contact one of our Florida attorneys for personalized guidance.
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