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Internal Revenue Code 121 and Second Homes

IRC 121 is a part of the Taxpayer Relief Act of 1997.

It provides up to $500,000 tax-free real estate capital gains for couples.

Moving into a second home for two years makes IRC 121 applicable to its sale.

Did you know?

IRC 121 replaced the old tax deferring “rollover” provision requiring the purchase of an equal or greater value home after selling a primary residence.

Before the Taxpayer Relief Act of 1997 homeowners could sell their primary residence and defer paying taxes on the gain by getting into a new home of equal or greater value within two years of the sale. This was known as the “rollover” provision. The relief act of 1997 repealed and replaced this provision with Internal Revenue Code (IRC) 121, a new tax-free capital gain exclusion on the sale of a primary home.

If the seller has owned and occupied the house for two of the previous five years, gains of up to $500,000 for couples and $250,000 for individuals are completely exempted from taxation. IRC 121 can even be utilized once every two years. In effect you can buy a home, watch it appreciate for the two years you live in it, and sell it at a tax-free profit.

IRC 121 also has exceptions to the two-year requirement in certain cases of a change in employment, health issues or other unforeseen circumstances.

You should keep up with the appreciation in your home’s value and sell to take advantage of IRC 121 before the gain gets above the exclusion limit. On the other hand, if your gain is already north of the limit, you might consider moving into a new permanent residence, rent out your gain-rich home and eventually trade it through a 1031 exchange to defer the taxes due.

What does IRC 121 mean to owners of second homes? You should strongly consider moving into your second home for two years if that is possible to realize the tax-free gains offered by IRC 121.