Capital Gains Tax Exclusion Primary Residence Information
To qualify for the exclusion: the ownership test (the taxpayer must have owned the property for at least 2 of the 5 years before the sale), the use test (the taxpayer must have used the property as their primary residence for at least 2 of the 5 years before the sale; the 2 years do not need to be consecutive), and the frequency test (the taxpayer has not used the exclusion for another home sale within the preceding 2 years). The exclusion amount: $250,000 for a single taxpayer, $500,000 for a married couple filing jointly (both spouses must meet the use test; only one spouse must meet the ownership test). The gain calculation: sale price minus adjusted basis (purchase price plus improvements minus depreciation) equals capital gain; the exclusion reduces or eliminates the taxable gain.
Florida Legal Definition
The primary residence exclusion is governed by: IRC §121 (federal tax law). Florida-specific considerations: no state income tax (the exclusion affects only the federal tax liability; Florida homeowners do not pay state capital gains tax regardless), the homestead exemption is separate (the Florida homestead property tax exemption under Article VII, §6 is unrelated to the federal §121 exclusion), and the documentary stamp tax applies regardless (the seller pays FL doc stamps on the sale price, whether or not the capital gains exclusion applies). Under Florida practice: the exclusion is particularly valuable in Florida (where property values have appreciated significantly; the exclusion allows homeowners to sell and reinvest without a substantial federal tax burden).
How It's Used in Practice
Attorneys advise homeowners on the primary residence exclusion. The attorney: evaluates the ownership and use tests (confirming the homeowner meets both tests), calculates the capital gain (sale price minus adjusted basis), applies the exclusion ($250K or $500K), evaluates the frequency test (no prior exclusion within 2 years), advises on partial exclusions (if the homeowner does not meet the full requirements: a partial exclusion may be available for: health, employment, or unforeseen circumstances), and coordinates with the CPA (ensuring proper reporting on the federal tax return). The attorney advises: the §121 exclusion is one of the most valuable tax benefits available to homeowners; homeowners should plan their timing to maximize the exclusion.
Key Takeaways
- §121: exclude $250K (single) or $500K (married) capital gain on primary residence.
- Must own and use as primary residence for 2 of 5 years.
- FL: no state income tax; exclusion affects federal return only.
- Cannot use exclusion more than once in 2-year period.
- Partial exclusion available for health, employment, or unforeseen reasons.
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Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC