Class notes
TAX 3300 SALE OF Principal Residence IRC Notes
- Course
- Federal Taxation 3300
- Institution
- Baruch College
Comprehensive and detailed Note on SALE OF Principal Residence IRC. *Essential Study Material!!
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SALE OF PRINCIPAL RESIDENCE IRC §121I. Summary.
A. General Taxation of Sale of Principal Residence. A taxpayer's principal residence is a
capital asset. Upon the sale of a principal residence, the taxpayer realizes capital gain or
loss. However, no loss is recognized, because a residence is personal in nature.
B. IRC §121 Exclusion. Although the sale of real property is normally a taxable event, an
exclusion from gross income may be available in the case of a sale of the taxpayer's
principal residence that qualifies for such treatment. Treas. Reg. §1.121-1(b)(2).
II. Exclusion Amount.
A. IRC §121 Exclusion. Amount In the case of a sale that produces gain, IRC § 121 provides
an exclusion from income for a portion of such gain which is a maximum amount of
$250,000 or $500,000 (MFJ). §121(b), Treas. Reg. §1.121-2(a).
1. Example. Taxpayer, who is unmarried, purchased a house in 1999 for $95,000,
which is his principal residence. He puts a new roof on the structure,
expending $5,000, bringing his total basis to $100,000. He sells it in 2011 for
$400,000, producing gain of $300,000. Taxpayer may exclude up to $250,000
of gain under §121. The remaining $50,000 of gain must be recognized (as
long-term capital gain).
B. Joint Returns. The $250,000 ceiling amount is increased to $500,000 in the case of
married couples if the following conditions are met:
a joint return is filed for the tax year of sale; §121(b)(2); Reg. §1.121-
2(a)(3);
either spouse meets the ownership requirement with respect to the
sold residence; §121(b)(2)(A)(i); Reg. §1.121-2(a)(3)(i)(A);
both spouses meet the aggregate use requirement; §121(b)(2)(A)(ii);
Reg. §1.121-2(a)(3)(i)(B); and
neither spouse is ineligible for the benefits because, during the two-year
period ending on the date of the sale or exchange of the residence,
there was a sale or exchange by either spouse of another principal
residence that qualified for the §121(a) exclusion from income (see
Requirements below).
1. Example. H and W are married and file a joint return. H has owned a house as
his separate property (i.e., wife has no ownership interest therein), for the
past six years. H purchased the home for $200,000. H and W have used the
house as their principal residence for the last three years. H and W decide to
sell the house in 2011 for $650,000. H and W may exclude the $450,000 of
1
, gain on the sale under §121 despite the fact that W has no ownership interest
in the residence.
2. Joint Return with Deceased Spouse. For tax years beginning after 2007, a
surviving spouse is eligible for the full $500,000 exclusion if: (i) he/she sells the
house within two years after the decedent spouse's death, and (ii) the other
eligibility requirements for the $500,000 exclusion were met immediately
before the date of death.
3. Filers not Sharing Same Residence.
a. Exclusion. In the case of joint filers not sharing a principal residence,
an exclusion of $250,000 is available on a qualifying sale of the
residence of one of the spouses. §121(d)(1); Tres. Reg. §1.121-2(a)(3)
(ii).
b. Example: H and W are married and file a joint return. H has owned a
house in State B for six years, which he has used as his principal
residence for two years. W has owned a house in State C for 10 years,
which she has used as her principal residence since purchase. They
decide to sell both residences and purchase one home together. H and
W may each exclude up to $250,000 of gain from the sale of their
principal residences provided that each spouse would be permitted to
exclude up to $250,000 of gain if they filed separate returns.
C. Limitations
1. Depreciation. The portion of gain from the sale of property attributable to
depreciation after May 6, 1997, is not eligible for the exclusion. §121(d)(6).
Example. T owns a home which T rents. T’s initial basis was $500,000
but depreciated $100,000, and therefore lowered T’s basis to $400,000.
T converts the home to T’s principal residence and lives there for 2
years. T sells the home for $605,000. Although T’s gain is $205,000
($605,000 - $400,000 basis), T may only exclude $105,000 of gain. The
$100,000 of gain attributable to the $100,000 of depreciation taken is
not eligible for section 121.
III. Requirements for IRC §121.
A. General Rule. The home-sale gain exclusion rule generally allows a taxpayer to exclude
from gross income, gain realized from the sale or exchange of property if, during the
five-year period ending on the date of the sale or exchange, such property has been
owned and used by the taxpayer as the taxpayer's principal residence for a period
aggregating two or more years.
B. Definition of Principal Residence. Principal residence depends on facts and
circumstances see Treas. Reg. §1.121-1(b)(2)
1. Where tp spends most of his or her time
2
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