The Housing Act contained a section that alters Section 121. Currently, Section 121 allows property owners to sell property that was used as their home and subtract up to $250,000 in gains per homeowner ($500,000/married couple) from their income. Section121 only applies to the property owner’s home and not to rental property. Property owners must have lived in their home for 2 out of the last 5 years to qualify for the exclusion.
Recently, combining Sections 1031 and 121 became somewhat common as a income tax planning strategy. It allowed property owners to convert their property from either their home to investment property of vice versa.
Changes to Section 121
However, the Housing Act amended Section 121 so that it no longer allows property owners to write off the exclusion on the sale of their home if the property was also used as rental property.
Non-qualified use (home used for vacation or investment) after the property was used as a home will not count against the property owner. Only non-qualified use before the property is used as the home will count against the property owner.
The gain from the sale of the home is divided between qualified and non-qualified use. The division is based upon the amount of time the property was held and used as qualified versus non-qualified use and then divided by the total number of years that the property was held by the property owner.
Gain belonging to the time that the property was used for non-qualified use will no longer qualified under Section 121 and will not be excluded from the property owner’s income. Gain belonging to the time that the property was used for qualified use (home) will still qualify under Section 121 and will be excluded from the property owner’s income.
Effective Date
These changes to Section 121 apply to the sale of property after 12/31/2008.
Transitional Period
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