Tax planning for the sale of a principal residence: final regulations on the principal residence exclusion clarify some issues under sec. 121 and create new tax planning opportunities.
The Tax Adviser › Vol. 35 Nbr. 1, January 2004
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Tax planning for the sale of a principal residence: final regulations on the principal residence exclusion clarify some issues under sec. 121 and create new tax planning opportunities.
On Dec. 23, 2002, the IRS issued final regulations on the exclusion of gain from the sale of a principal residence under Sec. 121. (1) The final regulations clarified several areas of concern in the proposed regulations and created several new tax planning opportunities to accompany the many existing under Sec. 121 and the proposed regulations. This two-part article emphasizes new opportunities created by the final regulations.
Part I, below, discusses the major rules and planning opportunities for required periods of ownership and use and how the property is used. Part II, in the February 2004 issue, will discuss how the property is owned. Overview Sec 121 was enacted in the Taxpayer Relief Act of 1997 and is generally effective for sales or exchanges of a principal residence after May 6, 1997. A taxpayer may exclude $250,000 of gain ($500,000 on certain joint returns) from the sale if he or she owned and used the residence as his or her principal residence for two of the five years preceding the sale date. In general, the gain exclusion may not be taken again until two years after a sale resulting in an exclusion. Example 1: T lived in a rental apartment in Chicago, IL, until she bought her first home for $165,000 on Aug. 15, 1999 (the closing and titl...See the full content of this document
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