Assignment no 1

Section 121 of the Internal Revenue Code

Section 121 of the Internal Revenue Code provides exclusion to taxpayers from capital gain from sale or exchange of property, which has been owned and used by the taxpayer(s) as his/their primary residence for a period of 2 years or more in the last 5 years, before the sale or exchange of the prior.

However, there are certain limitations to the above-mentioned exclusion. Single taxpayers are limited to a maximum exclusion of $250, 000 while joint taxpayers are limited to a maximum exclusion of $500,000. For spouses that had not been married during the prescribed period but would be filing for joint returns, each spouse would be limited to a maximum exclusion of $250,000, where each spouse would be treated as having owned the property during the stated period. For an unmarried taxpayer, whose spouse is deceased, the taxpayer would be limited to a maximum exclusion of $500,000, if the sale takes place not more than 2 years from his/her death. The exclusion under this section is only applicable for 1 sale or exchange every 2 years, and does not include sales before May 7, 1997.

This section further imposes a limitation on sale or exchange of property, which has been used for non-qualified purposes. “Period of non-qualified use” refers to any period as of January 1, 2009 whereby the property has not been used as the primary residence of taxpayer(s), their spouse or former spouse. However, it does not include the 5 years before the sale or exchange of the property, any period during which the taxpayer(s) were serving on qualified official extended duty or any period of temporary absence due to health, employment or unforeseen circumstances, not exceeding a total period of two years. In such a case, the exclusion will not apply to so much of the capital gain and will be calculated based on the ratio of period of non-qualified stay to the period the property was owned by the taxpayer(s).

On the other hand, taxpayers who have failed to meet the requirements of the exclusion benefit from this section as well. In case the taxpayer(s) is/are unable to meet requirement of primary residence as stated in the first paragraph or taxpayer(s) who are selling or exchanging the property have had more than one sale in the last 2 years then the limitations as stated in paragraph one shall be equal to an amount which is of the same ratio as to the limitation which was to be imposed. The ratio would be calculated based on the period the property was used as a principal residence by the taxpayer(s) during the 5 years before the sale or exchange of the prior, or based on the