Thursday, July 8, 2021 / by Ryan Nager
What you need to know about the primary residence principal exemption.
You can potentially make up to $500,000 and not have to pay a single tax on it. This is called a primary residence principal exemption, and it states that if you decide to sell your home and you’ve lived in it for two out of the last five years, the money you make from that sale would not be taxed. A married couple wouldn’t have to pay any taxes on the gain from up to a $500,000 taxable event, and it’s $250,000 if you’re filing as a single person. This is a unique exemption that I’ve used myself, and I’ve seen clients use it to help them move to a more expensive property.
The primary residence principal exemption isn’t a one-time exemption either, you can use it as many times as you want. Especially with how much equity people have gained in our real estate market over the last couple of years, they may be worried about how much they’d have to pay back in taxes when they sell. Arizona has seen such growth that our average sales price is just above $500,000, so plenty of people are likely sitting on a bunch of equity. That’s the main reason why I’m discussing this exemption today––because many don’t know it exists and how much it can help them.
"I’ve had multiple clients benefit from the wealth available to property owners through this exemption."
This great tax break doesn’t just apply to a principal residence, it can also apply to real estate investors through what’s called a 1031 exchange. A 1031 exchange means that if an investor sells their rental property and takes the gain and puts it into another property, they wouldn’t have to pay taxes on that sale. There are a couple of stipulations; for example, you have to sell the first property and buy the second one within 90 or 120 days.
I want to stress that you’re not avoiding taxes with the primary residence principal exemption or a 1031 exchange, you’re just deferring them until you get to a point where you sell and it no longer applies to you. You’ll probably be paying those taxes much later in life and might be at a very different taxable income level. I’ve had multiple clients benefit from the wealth available to property owners through this exemption.
Give me a call or visit my website if you have any questions about how this exemption works or if you want me to direct you to a company that can help you with a 1031 exchange. I’d love to be your real estate resource.