When it comes to issues related to capital gains taxes associated with the sale of real estate, there are two primary provisions of the tax code that apply, IRC Section 1031 and IRC Section 121. Many people are unaware that when a property is used as a personal residence as well as for business or investment purposes, it is a mixed-use property that can benefit from both provisions of the tax code at the same time. Some examples of this are;
- a home office
- a property that has an owner-occupied residence as well as a separate unit that is rented, such as an accessory dwelling unit (ADU) or portion of the property that is rented on Airbnb or VBRO
- a duplex with the owner residing in one unit and a tenant in the other
- a farm or ranch where a portion of the property is owner-occupied (link to farm and ranch newsletter)
The basic requirements for tax exclusion or deferral under IRC Section 121 and Section 1031 are:
IRC Section 121
When a personal residence is sold, IRC Section 121 allows for capital gain tax exclusion of up to $250,000 if a taxpayer is single, and up to $500,000 if a taxpayer is married and filing a joint return, as long as the property has been the primary residence of the taxpayer for an aggregate of two of the preceding five years before the sale. The Section 121 exclusion may be utilized once every two years.
