Brandt Nicholson, JD, Principal

 

Personal Residence Exclusion

 

IRC Section 121 provides for a $250,000 exclusion (single owner) or $500,000

exclusion from capital gain recognition for those who have lived in the residence

for two of the five years preceding its sale. The provision may be used as often

as the two of five-year requirements is met.

As of February, 2005 (Rev. Proc. 2005-14) there is now available the application

of the combined use of Sections 121 and 1031 in the exchange of a single property.

This can be particularly useful where the Section 121 exclusion is not sufficient to exclude

all gain. The owner may, through an exchange on the same property, defer gain

recognition or the gain not excluded.

One caveat is required where the exchanger acquires the replacement property, rents

it for a period sufficient to complete the exchange (at least six months to a year) and

then moves into it as a personal residence. Having rented it for a year and moved in

for two years, the exclusion is not then immediately available. They must own it for five

years before selling it to avail themselves of the applicable exclusion.