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Many potential home buyers enter the housing market looking for something they can call “home”. Many look for a property based on personal aesthetics. However, these may not be the best indicators of a good investment property. Buying the ‘dream home’ may require a stringent, long-term financial requirement of the homeowner; one that may limit those who aspire to build an investment property portfolio. By purchasing a property for a primary residence not as long-term commitment but as a strategic investment decision, homeowners can take advantage of a provision in the IRS Tax Code that may enable them to acquire more investment property.

• 26 U.S. Code § 121 – Exclusion of gain from sale of principal residence
  • Sale of property exempt from gains tax if property was held as principal residence for a minimum of 2 out of 5 years of ownership
  • Single taxpayers entitled up to $250k exemption
  • Joint filing taxpayers entitled up to $500k exemption
  • Mandatory, 2-year residency need not be contiguous
  • Applicable to one sale every two years, no limit on how often this may be done by homeowner
• Things to Know
  • Look for properties that are good investment decisions
    • Sect. 121 only applies to exemption from Capital Gains Tax, meaning only a property that is being sold for higher than original purchasing price
  • Sect. 121 may not be good for those looking to have children.
  • Money saved in exclusion from gains tax may be used to acquire new properties
• Exceptions
  • Check with tax adviser or C.P.A. for eligibility; you may still be eligible for partial exemption
  • Sect. 1031 Exchange – enables investors to sell a property with capital gains and receive a deferral on gains tax if purchasing a new one
    • If property was acquired as a replacement property and converted to a primary residence, investor must live in property for 5 yrs before qualifying under Sect. 121
  • Sect. 121 cannot exclude Depreciation Recapture Tax (25%)