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Richard
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 53961
Experience:  29 years of experience as a tax, real estate, and business attorney.
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I am selling my primary residence that I have lived in for

Customer Question

I am selling my primary residence that I have lived in for 8 years. If I profit less than $250K on the sale, is there any obligation to reinvest this in another property and if so what is the time frame that this has to occur in order to avoid paying capital gains? Secondly, does the profit amount include the selling price minus the buying price? Does the amount of equity I have currently in the home (amount of the loan I have payed off) play into the amount of profit I make?
Submitted: 1 year ago.
Category: Tax
Expert:  Richard replied 1 year ago.
Hi! My name is ***** ***** I look forward to helping you!
Your gain is the sale price (less closing costs) in excess of your basis. Your basis is the purchase price plus the cost of any improvements you have made. There is no obligation to reinvest the proceeds from sale and your equity is not relevant to the calculation of profit. Your gain is figured as above and Section 121 of the Internal Revenue Code allows you to exclude up to $250,000 of that gain ($500,000 if married) because it's your principal residence no matter what you do with the proceeds.
Section 121 provides as follows:
"26 U.S. Code § 121 - Exclusion of gain from sale of principal residence
(a) Exclusion
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.
(b) Limitations
(1) In general
The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000.
(2) Special rules for joint returns
In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property—
(A) $500,000 Limitation for certain joint returns
Paragraph (1) shall be applied by substituting “$500,000” for “$250,000” if—
(i)either spouse meets the ownership requirements of subsection (a) with respect to such property;
(ii)both spouses meet the use requirements of subsection (a) with respect to such property; and
(iii)neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3)."
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