A 121 capital gains exclusion is a tax break available to homeowners who sell their primary residence. Under this provision, a homeowner can exclude up to $250,000 of capital gains from the sale of their home if they have lived in the home for at least two of the last five years. For married couples filing jointly, the exclusion is up to $500,000.
Here’s a guide on how to use a 121 capital gains exclusion when selling your real estate:
- Determine if you are eligible: To be eligible for the 121 capital gains exclusion, you must have owned and lived in the property as your primary residence for at least two of the last five years. If you meet this requirement, you may be eligible to exclude up to $250,000 of capital gains from your taxable income.
- Calculate your capital gains: To calculate your capital gains, subtract your adjusted basis from the sale price of the property. Your adjusted basis is the original purchase price plus any capital improvements made to the property. You can also deduct selling costs from your capital gains, such as real estate agent fees and advertising expenses.
- Claim the exclusion on your tax return: If you meet the eligibility requirements and have a capital gain on the sale of your primary residence, you can claim the 121 capital gains exclusion on your tax return. This exclusion is not automatic, so you must report the sale of your home and claim the exclusion on IRS Form 8949 and Schedule D.
- Be aware of the limitations: There are some limitations to the 121 capital gains exclusion. For example, you can only use this exclusion once every two years. Additionally, if you have a capital gain over $250,000 (or $500,000 for married couples), you will have to pay capital gains tax on the excess amount.
- Consider consulting a tax professional: If you have questions about using the 121 capital gains exclusion, or if you’re unsure if you’re eligible, consider consulting a tax professional. They can help you understand the tax implications of selling your primary residence and provide guidance on how to minimize your tax liability.
In summary, the 121 capital gains exclusion is a valuable tax break that can help homeowners save money when selling their primary residence. By following the steps outlined above and seeking professional advice if needed, you can make the most of this tax benefit and reduce your overall tax liability.