Software Features

BROKERAGE SERVICES

Software Features

Property Data

Research properties and their owners, compile lists, and more.

MLS Comps

A multiple-listing service comparable tool.

Listings

List your properties with Propelio Realty for incredible savings.

Short Sales

If you have an underwater property, our experts can help.

For Education

Blog

Interesting and valuable articles from Propelio and the industry.

Academy

Real Estate education platform led by a team of professionals.

Propelio TV

A channel that gives daily updated archive of our live video.

Discover Propelio

About Us

Get to know Propelio better – explore our story and mission.

Map Coverage and Brokers

Shows MLS coverage and broker transactions in your state.

Referral Program

Share Propelio with friends and family to earn exciting rewards

Template is not defined.
Play Video

Mastering Tax-Free Home Gains with Section 121

Welcome to an exciting deep dive into the smart ways real estate investors can utilize Section 121 of the IRS tax code to purchase personal residences. If you’re looking to save a bundle legally, this blog is for you.

Understanding Section 121

Under Section 121 of the IRS tax code, you can exclude up to $250,000 of capital gains on the sale of your home if you’re single, and up to $500,000 if you’re married and filing jointly. The key requirement is that you must have lived in the property as your primary residence for at least two out of the previous five years.

Legally Avoiding Taxes

You might think avoiding taxes is a shady area, but this isn’t loophole exploitation—it’s entirely legal. The IRS allows you to benefit from this rule precisely because it supports homeownership.

Real-World Application

Imagine you bought your first home with a traditional loan, aimed to flip it, but ended up living there for two years while fixing it up. Upon selling, you reap the benefits of Section 121, taking home gains tax-free. By repeating this process every few years, you could amass significant liquid capital without facing a tax hit.

Detailed Step-by-Step Strategy

  1. Purchase a primary residence: Use a traditional loan or other financing methods to buy a home.
  2. Live in the property: Make sure to live in the home for a minimum of two years within any five-year window.
  3. Sell for gains: Upon selling, exclude up to $250,000 (or $500,000 if married) from your taxable income.
  4. Repeat: Reinvest your tax-free capital gains into another property and continue the cycle.

Refinancing for Quick Cash Flow

If waiting two years to access your capital gains seems too long, consider a cash-out refinance. This method lets you pull equity from the home without selling it, giving you liquid cash to invest elsewhere. Use this capital for other investments, then sell the house tax-free once the two-year period is up.

Advanced Tactic: Combining Section 1031 and 121

Pair Section 121 with a 1031 exchange—a method that allows you to defer paying capital gains taxes when you sell investment properties and reinvest the proceeds in similar kinds of property. See how it works:

  1. Sell an investment property: Use a 1031 exchange to buy a new property.
  2. Move into the new property: Turn it into your primary residence.
  3. Hold for two years: Live in the home to meet Section 121 requirements.
  4. Sell tax-free: Benefit from the exclusion of up to $500,000 in gains.

Example Scenario

You have a commercial property that’s about to net you $500,000 in gains. Instead of paying a significant portion in taxes, execute a 1031 exchange to reinvest in a personal residence. Live in this new home for two years, and when the time comes to sell, you pocket up to $500,000 tax-free.

Real-Life Successes

Many seasoned investors have said it’s possible to pair 1031 exchanges and Section 121 to keep their gains tax-free. One investor shared his success story, flipping properties every two years and amassing substantial wealth without the tax burden. Though not every investor will find the same outcome, it’s worth consulting a financial advisor to explore how this could work for you.

Summary

Savvy real estate investors can strategically utilize Section 121 of the IRS tax code to maximize their tax savings on personal residences. By understanding and applying the primary residence exclusion rule, they can potentially exclude significant capital gains from taxation. Moreover, by combining Section 121 with a 1031 exchange, investors can defer taxes on investment properties and further enhance their financial growth. 

While these strategies can be highly beneficial, it is essential to consult with a financial advisor to ensure compliance and optimize benefits. With careful planning and execution, real estate investors can leverage these tax code provisions to build substantial wealth efficiently and legally.

Get started with Propelio and unlock all the tools you need to succeed in real estate. Sign up now for a 14-day FREE trial: Start Free Trial

show less

Leave a Reply

Your email address will not be published. Required fields are marked *

Recent Episodes

Play Video
73 minutes

Real estate investing isn’t just for adults. Smart teenagers can start building wealth...

Play Video
13 minutes

Success in real estate can seem mysterious to newcomers. Some imagine it involves...

Play Video
19 minutes

Starting a real estate business requires more than just finding great deals. Protecting...

Play Video
60 minutes

Real estate investing comes with countless strategies, but few are as misunderstood—or as...

Play Video
38 minutes

Success in real estate hinges on more than just buying and selling houses....

Play Video
74 minutes

Owner financing is a fantastic tool for real estate investors who want to...

Play Video
40 minutes

Owner financing can be a powerful way to invest in real estate, offering...

Play Video
15 minutes

Real estate investing comes with its own language, filled with acronyms and terms...

Play Video
24 minutes

Donovan Ruffin has quickly made a name for himself in real estate. Starting...

Play Video
17 minutes

Not knowing how to estimate a rehab budget can feel overwhelming, especially with...

<span data-metadata=""><span data-buffer="">Propelio TV

Do you love learning from your favorite hosts? Subscribe and we will notify you when we release new shows.