If you’ve owned your home for a long time, its value may have grown far beyond the limits of the Section 121 home sale exclusion ($250,000 for singles, $500,000 for joint filers). This could leave you with a sizable tax bill when you sell.
A Powerful Tax-Saving Strategy
By combining the Section 121 exclusion with a 1031 exchange, you can minimize or defer taxes. With proper planning, this strategy is fully approved by the IRS and works as follows:
- Claim the Home Sale Exclusion: Exclude up to $250,000 ($500,000 for couples) of gain from taxes under Section 121.
- Defer Remaining Gains: Convert your former home into a rental or investment property for at least two years, then use a 1031 exchange to defer taxes on the remaining gain.
Both the relinquished property (your converted home) and the replacement property must be held for business or investment purposes to qualify under Section 1031. This “double play” lets you maximize tax breaks while unlocking your property’s full potential forfuture investments.
