Primary Residence Gain Exclusion: How to Avoid Paying Capital Gains on the Sale of a Primary Residence Turned Rental Property

Let’s talk about Section 121 - Primary Residency Gain Exclusion

Did you know?!

The IRS allows you to exclude $250,000 of gain on sale of your primary residence and $500,000 if you are married. In order to qualify for this gain exclusion, you must have lived in the property as your primary residence for 2 out of the last 5 years and pass a few other tests defined by the IRS. 

What this means is that you could potentially live in a property as your primary residence for 2 years, rent it out for the next 2.5 years, and if you sold it before that 5 year ending period - you would still be eligible for the capital gain exclusion.  

Important things to note - You would still be required to pay depreciation recapture tax on the sale for the period you rented out the property. The gain exclusion doesn’t get you out of depreciation recapture. 

If you are interested in learning more about this strategy, reach out today to schedule a tax strategy call.