WEBVTT NOTE This file was generated by Descript 00:00:23.370 --> 00:00:24.270 Hey everyone. 00:00:24.270 --> 00:00:26.520 And welcome to today's episode. 00:00:27.060 --> 00:00:31.620 If you have heard me speak somewhere, or if you followed me on social media. 00:00:31.920 --> 00:00:35.790 Then you will know that today's episode topic is something I 00:00:35.790 --> 00:00:37.800 am incredibly passionate about. 00:00:38.220 --> 00:00:42.090 The reason being is that this is something that impacts an 00:00:42.090 --> 00:00:43.920 incredible amount of Americans. 00:00:44.340 --> 00:00:46.830 Whether or not, they are a real estate investor. 00:00:47.530 --> 00:00:52.000 what I want to talk to you guys about today is the 1 21 exclusion 00:00:52.120 --> 00:00:54.580 or the primary home sale exclusion. 00:00:55.090 --> 00:00:59.860 So I want to start by giving you guys a brief recap on what this is. 00:01:00.190 --> 00:01:03.220 And then I want to walk through the five most common mistakes. 00:01:03.220 --> 00:01:03.970 I see. 00:01:04.300 --> 00:01:09.370 That could be costing you thousands of dollars in tax, if either you or your 00:01:09.370 --> 00:01:11.800 tax professional don't understand this. 00:01:12.370 --> 00:01:14.140 So starting with the basics. 00:01:15.040 --> 00:01:18.970 The 1 21 exclusion or primary home sale exclusion. 00:01:19.330 --> 00:01:25.600 Says that if you own and occupy your primary home for two of the most recent 00:01:25.600 --> 00:01:30.700 five years, when you sell it, you get to exclude a large amount of the gain. 00:01:31.330 --> 00:01:36.460 It's important to note that this is actually based on the number of days. 00:01:36.880 --> 00:01:41.560 So it's not based on a calendar year or a ballpark based on the month 00:01:41.560 --> 00:01:43.330 you moved in and the month you sold. 00:01:43.780 --> 00:01:47.890 It is the literal number of days that you own and occupy. 00:01:48.580 --> 00:01:51.760 What this means is that when you're hearing two of five years, 00:01:52.150 --> 00:01:56.380 What you need to do if you are considering selling a primary home. 00:01:56.980 --> 00:02:01.330 Is that you need to look at the day you bought it and moved in and the day 00:02:01.330 --> 00:02:02.830 you would be selling it and move out. 00:02:03.400 --> 00:02:09.040 It is actually 730 days out of 1,825 days. 00:02:09.490 --> 00:02:14.770 So if you have a qualifying move in and that becomes your home on June 1st. 00:02:15.280 --> 00:02:18.790 And then you go to sell it two years later, but you sell it on. 00:02:19.150 --> 00:02:22.810 May 15th, you will not reach that exclusion. 00:02:23.170 --> 00:02:24.610 I have seen people. 00:02:24.820 --> 00:02:28.960 I think that they are going to have their gain fully qualify under this. 00:02:29.530 --> 00:02:33.460 And then literally miss it because they moved out and sold the primary home. 00:02:33.820 --> 00:02:35.290 A couple of weeks too soon. 00:02:35.710 --> 00:02:37.600 You do not want to make that mistake. 00:02:37.810 --> 00:02:41.710 So ensure that if you are planning to sell a home that you have used 00:02:41.710 --> 00:02:45.970 as your primary, that you nail that down to the literal day. 00:02:47.320 --> 00:02:51.130 Another common thing that I'm not sure people are aware of, but is 00:02:51.130 --> 00:02:52.990 really important for you to know. 00:02:53.740 --> 00:02:57.580 Is, we often also hear that this exclusion, right. 00:02:57.580 --> 00:03:00.670 You own an occupy for two out of five years, which we've just learned is 00:03:00.700 --> 00:03:04.300 actually 730 days out of 1825 days. 00:03:05.470 --> 00:03:08.950 Gets you $250,000 of gain. 00:03:08.980 --> 00:03:09.640 Tax-free. 00:03:09.640 --> 00:03:12.970 If you're single or 500,000, if you're married. 00:03:13.810 --> 00:03:15.400 That is typically the case. 00:03:16.210 --> 00:03:20.290 But something people don't consider is it's not technically related to being 00:03:20.290 --> 00:03:22.420 single or married most of the time. 00:03:23.110 --> 00:03:29.230 Each legal owner who meets the qualifying terms of ownership and occupancy. 00:03:29.800 --> 00:03:33.730 Qualifies for their own $250,000 exclusion. 00:03:34.540 --> 00:03:35.620 What does this mean? 00:03:35.980 --> 00:03:39.160 This means if you and two of your siblings. 00:03:39.460 --> 00:03:44.560 Buy a house together and live together in that house for more than two years. 00:03:45.010 --> 00:03:46.360 When you go to sell it. 00:03:46.690 --> 00:03:53.560 If your gain is above $500,000, you can still exclude it because each one 00:03:53.560 --> 00:03:56.560 of you has your own 1 21 exclusion. 00:03:56.950 --> 00:04:03.100 So in theory, If three people all legally own a primary residence 00:04:03.100 --> 00:04:07.810 together, and they all use it as their primary residence for two years. 00:04:08.530 --> 00:04:13.120 When they go to sell it up to 750,000 of gain could be excluded. 00:04:13.810 --> 00:04:19.240 That is because the 250,000 excludable gain is per legal owner. 00:04:20.080 --> 00:04:22.000 So, those are kind of the basics. 00:04:22.660 --> 00:04:24.190 Of the 1 21 exclusion. 00:04:24.670 --> 00:04:27.580 You own an occupy a home for two out of five years, but 00:04:27.580 --> 00:04:29.290 the caveat is it's to the day. 00:04:29.290 --> 00:04:30.100 Be cautious. 00:04:30.940 --> 00:04:35.470 And you get $250,000 of excludable gain per legal owner. 00:04:35.920 --> 00:04:37.390 So you can actually exclude. 00:04:37.780 --> 00:04:39.190 More than 500,000. 00:04:39.940 --> 00:04:42.340 This is a tax provision. 00:04:42.910 --> 00:04:49.000 That is incredibly powerful, very few ways that you can make a half million 00:04:49.030 --> 00:04:51.160 dollars and not pay any tax on it. 00:04:51.910 --> 00:04:53.620 In conjunction with that. 00:04:53.980 --> 00:04:59.020 There's a lot of nuance that relates to this section of the tax code. 00:04:59.620 --> 00:05:03.040 And there's a lot of pieces that are often misunderstood. 00:05:04.420 --> 00:05:06.340 What I'm going to dive into now. 00:05:06.730 --> 00:05:08.890 Are the five most common mistakes. 00:05:08.890 --> 00:05:09.610 I see. 00:05:10.030 --> 00:05:12.130 Related to the 1 21 exclusion. 00:05:13.240 --> 00:05:16.090 There are absolutely more mistakes than this. 00:05:16.330 --> 00:05:20.530 There are absolutely more ways I've seen this screwed up, but these are the five 00:05:20.530 --> 00:05:24.880 that you need to know to make sure that you are not paying tax for no reason. 00:05:25.390 --> 00:05:29.560 And most of these mistakes I have seen from both tax professionals. 00:05:30.220 --> 00:05:31.840 And taxpayers. 00:05:31.840 --> 00:05:36.070 So some professionals even get these mixed up, so we're going to dive into it and 00:05:36.070 --> 00:05:41.590 make sure, you know, Every little detail to avoid these five most common mistakes. 00:05:42.340 --> 00:05:43.900 The first common mistake. 00:05:44.410 --> 00:05:46.210 Or the first common misunderstanding. 00:05:47.440 --> 00:05:53.650 Is that if after you use your home as a primary home for at least two years, 00:05:54.340 --> 00:05:58.420 If you convert that to a rental, you move out, you decided to rent the house. 00:05:59.680 --> 00:06:03.130 That you by default have non-qualified use. 00:06:04.300 --> 00:06:10.420 The tax code defines non-qualified use as any time that house is not 00:06:10.420 --> 00:06:12.460 used as your qualified primary home. 00:06:12.970 --> 00:06:18.820 So it is true that if you lived in it for two years and then changed it to a rental. 00:06:19.300 --> 00:06:20.740 Those years when you're renting it. 00:06:21.010 --> 00:06:22.840 It's technically not your primary home. 00:06:22.840 --> 00:06:24.730 It wouldn't be your qualified main home. 00:06:25.390 --> 00:06:29.230 However, there is an exception in the tax code. 00:06:29.740 --> 00:06:30.280 There's all. 00:06:30.340 --> 00:06:31.660 There's so many exceptions. 00:06:32.020 --> 00:06:36.490 So there's an exception in this code provision that says any 00:06:36.490 --> 00:06:40.810 time the home is not being used as the primary residential home. 00:06:41.500 --> 00:06:43.210 Um, it's non-qualified use. 00:06:43.690 --> 00:06:44.590 Accept. 00:06:45.460 --> 00:06:47.620 If that time occurs. 00:06:48.220 --> 00:06:53.890 After the most recent time that you used it as your primary home. 00:06:54.760 --> 00:06:55.810 What does this mean? 00:06:57.100 --> 00:07:01.300 So if we think back to the basics, To sell your primary home. 00:07:01.300 --> 00:07:02.050 Tax-free. 00:07:02.740 --> 00:07:07.180 You have to own and occupy for two of the most recent five years. 00:07:07.510 --> 00:07:09.850 What that effectively means is the day you go to sell. 00:07:09.880 --> 00:07:11.530 There's like a, five-year look back right there. 00:07:11.530 --> 00:07:12.580 Looking back five years. 00:07:12.940 --> 00:07:17.020 And as long as it, any time during that chunk, you had, um, owned and 00:07:17.020 --> 00:07:18.820 occupied it as your primary home. 00:07:19.420 --> 00:07:20.230 There's a good chance. 00:07:20.260 --> 00:07:21.070 You can qualify. 00:07:22.060 --> 00:07:23.440 Because this exception. 00:07:24.070 --> 00:07:28.570 His time after your most recent use as a primary with this means is that if you 00:07:28.570 --> 00:07:33.040 have lived in this home for two or more years, And you convert it to a rental. 00:07:33.550 --> 00:07:37.540 You have up to three years to sell where you can still receive 00:07:37.540 --> 00:07:39.790 your full 1 21 exclusion. 00:07:40.540 --> 00:07:42.280 Because it is a five-year look back. 00:07:43.120 --> 00:07:45.190 You have lived in at least two. 00:07:46.000 --> 00:07:50.740 And there's that exception that any time after your most recent use 00:07:50.770 --> 00:07:52.810 does not count as non-qualified. 00:07:53.530 --> 00:07:58.210 This is something I have seen multiple tax professionals get wrong. 00:07:59.320 --> 00:08:03.910 So if you live in your primary home, You convert it to a rental. 00:08:04.300 --> 00:08:06.640 And then you sell it within a three-year window. 00:08:07.600 --> 00:08:13.120 You still qualify for the entire 1 21 exclusion there's no, prorating, 00:08:13.150 --> 00:08:16.690 there's no part that's non-qualified use for those years are taxable. 00:08:17.080 --> 00:08:19.210 You qualify for the full exclusion. 00:08:19.720 --> 00:08:21.550 The only thing you would need to pay. 00:08:21.970 --> 00:08:25.600 Is you pay back that unrecaptured 1250 depreciation. 00:08:25.630 --> 00:08:28.390 So your straight line depreciation, you have to take on the house. 00:08:28.780 --> 00:08:30.130 For those years, it was a rental. 00:08:30.820 --> 00:08:31.210 But. 00:08:31.990 --> 00:08:33.490 There's not non-qualified use. 00:08:33.970 --> 00:08:36.130 I see this mixed up all the time. 00:08:36.610 --> 00:08:41.410 And it's resulting in taxpayers paying tax when they literally do not have to. 00:08:41.890 --> 00:08:43.720 So that is my first warning. 00:08:43.750 --> 00:08:47.830 This is the first thing that I think is so important to understand. 00:08:48.580 --> 00:08:53.920 The next mistake or the next common error is almost the inverse of the first one. 00:08:55.360 --> 00:08:58.270 This is the concept where people seem to have. 00:08:58.900 --> 00:09:03.400 They've gotten it in their brains, that the whole gist of this code 00:09:03.700 --> 00:09:06.550 is well, two out of five years, you get to sell it tax free. 00:09:06.550 --> 00:09:06.790 Right? 00:09:06.820 --> 00:09:07.510 Two out of five years. 00:09:07.510 --> 00:09:08.170 That's all you need. 00:09:08.170 --> 00:09:08.830 That's all you need. 00:09:09.400 --> 00:09:12.130 So I've seen a lot of people think. 00:09:13.000 --> 00:09:14.800 That if they've had a rental for. 00:09:15.340 --> 00:09:16.330 20 years. 00:09:16.990 --> 00:09:19.480 And it has a ton of gain built into it now. 00:09:19.510 --> 00:09:19.780 Right? 00:09:19.780 --> 00:09:23.410 If they sold it today that have a lot of gain, the value has gone up tremendously. 00:09:23.980 --> 00:09:27.100 And they think, oh, well I will just move into it for two years. 00:09:27.550 --> 00:09:28.540 And then I meet that. 00:09:28.600 --> 00:09:29.680 That criteria. 00:09:30.250 --> 00:09:34.360 That 1 21, 2 out of five year rule, and now I can sell it tax free. 00:09:34.420 --> 00:09:35.230 That's my plan. 00:09:36.670 --> 00:09:40.900 This is the circumstance where you do have non-qualified use. 00:09:41.590 --> 00:09:43.360 Again, non-qualified use. 00:09:44.080 --> 00:09:46.210 This became a thing in 2009. 00:09:46.390 --> 00:09:49.540 So any houses from prior to that, any rental time prior 00:09:49.540 --> 00:09:50.350 to that, we don't look at. 00:09:50.980 --> 00:09:56.650 But after January of 2009, any time a house was a rental before 00:09:56.650 --> 00:09:57.970 the time it was your primary. 00:09:58.510 --> 00:10:00.160 That is non-qualified use. 00:10:01.150 --> 00:10:05.890 So what this means is that if you owned and rented this house for 20 00:10:05.890 --> 00:10:10.300 years, And then you move into it for, to thinking you can exclude your 00:10:10.300 --> 00:10:12.910 full gain using the 1 21 exclusion. 00:10:13.330 --> 00:10:14.530 That's not the case. 00:10:15.430 --> 00:10:17.230 When there's non-qualified use. 00:10:17.980 --> 00:10:22.810 What happens then is the gain that is proportionate to the amount of years. 00:10:22.810 --> 00:10:24.520 It wasn't your qualified primary. 00:10:25.330 --> 00:10:28.870 The gain related to that number of years is in fact taxable. 00:10:29.440 --> 00:10:34.450 So in this example, 20 out of 22 years worth of the gain. 00:10:35.080 --> 00:10:36.610 Is going to be taxable. 00:10:36.640 --> 00:10:39.430 It cannot be excluded under the 1 21. 00:10:40.180 --> 00:10:41.920 Something else that people. 00:10:42.490 --> 00:10:43.960 Kind of misunderstand what this. 00:10:44.710 --> 00:10:46.480 Is there thought, is that okay? 00:10:46.480 --> 00:10:49.840 Well, of those two years left that qualify for the 1 21. 00:10:50.590 --> 00:10:52.810 They can exclude a smaller amount of gain. 00:10:52.810 --> 00:10:54.070 Like it reduces the gain. 00:10:54.610 --> 00:10:55.870 That's not the case either. 00:10:56.080 --> 00:11:00.040 They still qualify for that full amount of $250,000. 00:11:00.820 --> 00:11:03.430 It's just that the amount of overall gain. 00:11:04.390 --> 00:11:05.800 Would have to be tremendous. 00:11:06.430 --> 00:11:11.950 For two years worth of it to be under $250,000 or to get up to that point. 00:11:12.430 --> 00:11:15.880 So they can still exclude up to $250,000 worth of gain. 00:11:16.030 --> 00:11:21.610 As long as the portion of gain related to only two years is $250,000. 00:11:22.450 --> 00:11:24.430 But this is where non-qualified use. 00:11:24.670 --> 00:11:25.300 Does come in. 00:11:25.810 --> 00:11:30.550 So if you have had a rental property for years and years and years, and you think 00:11:30.550 --> 00:11:32.320 to yourself that you can move into it. 00:11:32.770 --> 00:11:34.750 Live there for a couple years and get to sell it. 00:11:34.750 --> 00:11:35.560 Tax-free. 00:11:36.130 --> 00:11:37.900 I will save you the you hall fees. 00:11:38.170 --> 00:11:41.140 Don't do this, not going to help now. 00:11:41.800 --> 00:11:43.060 If you move into it, right? 00:11:43.060 --> 00:11:44.620 Like say, you've already made this mistake, you're in your 00:11:44.620 --> 00:11:45.640 car, you're listening to this. 00:11:45.640 --> 00:11:46.840 And you're like, ah, crap. 00:11:47.380 --> 00:11:51.940 Um, it does get better the longer you live in it, because this is a ratio, right. 00:11:51.940 --> 00:11:55.540 So if you've owned it and rented it for 20 years, and then you move 00:11:55.540 --> 00:11:57.010 in and live in it for 20 years. 00:11:57.400 --> 00:11:59.590 Well, now half of the gain when you sell. 00:12:00.190 --> 00:12:02.620 Qualifies for the 1 21 exclusion. 00:12:03.430 --> 00:12:04.300 But just no. 00:12:04.750 --> 00:12:06.700 The recap on non-qualified use. 00:12:07.390 --> 00:12:11.530 If it's your primary first and you rented for no more than three years. 00:12:12.340 --> 00:12:16.390 There is no non-qualified use, you can sell it and get the full 1 21 exclusion. 00:12:16.390 --> 00:12:17.830 You just pay back depreciation. 00:12:18.430 --> 00:12:22.480 If it starts as a rental or starts as a business use property. 00:12:22.900 --> 00:12:24.250 And then you move into it. 00:12:24.640 --> 00:12:27.190 There will always be non-qualified use. 00:12:27.580 --> 00:12:29.200 That means the number of years. 00:12:29.650 --> 00:12:32.770 That it was rented out of the total number of years of ownership. 00:12:33.280 --> 00:12:37.450 That portion of the gain is always going to be taxable. 00:12:38.200 --> 00:12:44.770 The third common mistake that I see all the time related to the 1 21 exclusion. 00:12:45.430 --> 00:12:49.420 Is understanding when and when you do not have to prorate it. 00:12:49.930 --> 00:12:51.460 In relation to a house hack. 00:12:52.330 --> 00:12:53.050 Now. 00:12:53.320 --> 00:12:57.370 When we talk about house hacking, this term gets used interchangeably. 00:12:57.910 --> 00:12:59.830 For someone who is either. 00:13:00.760 --> 00:13:05.260 Living in a single family home and they essentially have roommates, right? 00:13:05.290 --> 00:13:06.850 You're living in your primary bedroom. 00:13:06.850 --> 00:13:08.530 You renting out the spare two bedrooms. 00:13:09.220 --> 00:13:13.060 This term also gets used for the circumstance where maybe you 00:13:13.060 --> 00:13:14.800 bought a duplex or a fourplex. 00:13:15.310 --> 00:13:17.950 You're living in one unit, you're renting out the other three. 00:13:18.700 --> 00:13:20.380 For all intents and purposes. 00:13:20.860 --> 00:13:22.840 Using the same term for both is, is fine. 00:13:22.870 --> 00:13:23.020 Right? 00:13:23.020 --> 00:13:25.480 We're doing kind of the same thing for taxes. 00:13:25.900 --> 00:13:28.840 There's a much bigger difference between the two. 00:13:29.920 --> 00:13:32.740 Like I saying earlier, and a lot of the tax code, there's 00:13:32.740 --> 00:13:34.360 often these weird exceptions. 00:13:34.390 --> 00:13:36.250 They love to throw something in there. 00:13:36.700 --> 00:13:39.130 Uh, just, just as a little test. 00:13:40.570 --> 00:13:43.030 So, this is where another exception comes into play. 00:13:44.500 --> 00:13:46.750 Normally with the 1 21 exclusion. 00:13:47.650 --> 00:13:51.880 It applies only to your dwelling unit. 00:13:52.720 --> 00:13:58.090 This is literally within the four walls of a separate unit that you occupy. 00:13:58.960 --> 00:14:04.300 So if you are house hacking, And you are house hacking a fourplex and you live in 00:14:04.300 --> 00:14:07.030 one unit and you're renting three units. 00:14:07.930 --> 00:14:09.340 When you go to sell. 00:14:10.210 --> 00:14:12.880 Only one fourth of the gain. 00:14:13.210 --> 00:14:15.220 Assuming all of the units are the same size. 00:14:15.760 --> 00:14:17.410 Only one fourth of the gain. 00:14:17.980 --> 00:14:21.400 Will you be able to exclude under the 1 21 exclusion? 00:14:21.790 --> 00:14:24.760 A lot of people think because they're living in the overall building, they 00:14:24.760 --> 00:14:26.500 can sell it and exclude the whole thing. 00:14:27.040 --> 00:14:27.880 It's not the case. 00:14:28.210 --> 00:14:33.610 It is literally your only, like literally only your unit, your legal dwelling unit. 00:14:34.510 --> 00:14:37.720 So the flip side to this and the exception. 00:14:38.950 --> 00:14:40.420 Where we do not need. 00:14:40.930 --> 00:14:44.110 To prorate where you can still get the full 1 21. 00:14:45.040 --> 00:14:47.800 Is if this space you are renting. 00:14:48.400 --> 00:14:50.380 Is within your telling unit. 00:14:51.550 --> 00:14:54.220 So in the circumstance where you're the house hacker who is 00:14:54.220 --> 00:14:55.750 renting your spare bedrooms. 00:14:56.440 --> 00:14:59.350 When you go to sell that house? 00:15:00.430 --> 00:15:04.240 You will still qualify for the full 1 21 exclusion. 00:15:05.380 --> 00:15:10.270 As long as the space being rented is within the same legal dwelling unit 00:15:10.270 --> 00:15:12.400 that you are occupying as your primary. 00:15:13.150 --> 00:15:15.340 It still qualifies for the full exclusion. 00:15:16.150 --> 00:15:19.120 Again, the only thing you pay back is the depreciation. 00:15:19.870 --> 00:15:21.730 So two strategies. 00:15:22.180 --> 00:15:23.200 Same name. 00:15:23.680 --> 00:15:24.640 We call on the same thing. 00:15:24.640 --> 00:15:26.080 We talk about them interchangeably. 00:15:26.920 --> 00:15:31.210 But it's important to be very aware that whether you're renting rooms in your 00:15:31.210 --> 00:15:36.340 house, Or whether you are living in one unit out of like a duplex or a four unit. 00:15:36.880 --> 00:15:38.530 The impact is going to be different. 00:15:39.280 --> 00:15:42.370 Renting rooms in your house, you can still qualify for that 00:15:42.370 --> 00:15:44.410 full tax-free primary exclusion. 00:15:45.340 --> 00:15:48.040 If you are living in a small multiunit property. 00:15:48.490 --> 00:15:52.330 Only your legal dwelling unit, only the proportion of gain. 00:15:52.960 --> 00:15:56.710 Proportionate to your unit square footage out of the total of that whole property. 00:15:57.520 --> 00:15:59.650 Only that piece is going to be excludable. 00:16:00.820 --> 00:16:02.950 Now the other three units. 00:16:03.550 --> 00:16:05.410 Those will all be taxable when you sell. 00:16:05.920 --> 00:16:09.520 And you can utilize a 10 31 exchange for the gain related to 00:16:09.520 --> 00:16:11.230 those three, if you would like. 00:16:11.680 --> 00:16:13.030 But that's a whole different episode. 00:16:13.510 --> 00:16:16.960 But just know that when you're looking at house hacking the type 00:16:16.960 --> 00:16:22.150 of property, your house hacking is going to impact what you can exclude 00:16:22.150 --> 00:16:24.190 under the primary home sale exclusion. 00:16:24.190 --> 00:16:25.030 When you sell. 00:16:25.480 --> 00:16:29.020 So just something to keep in mind, if that is part of your strategy. 00:16:29.410 --> 00:16:33.100 If your overall thought process is that you're not keeping this house long term. 00:16:33.400 --> 00:16:36.130 If you're planning to do somewhat of a live and fix and flip 00:16:36.160 --> 00:16:37.150 while you're house hacking. 00:16:37.720 --> 00:16:39.190 Very different impact. 00:16:39.640 --> 00:16:44.200 On if you are renting rooms in a house versus one unit or multi 00:16:44.200 --> 00:16:46.510 units in a small multi-family. 00:16:47.260 --> 00:16:47.800 The. 00:16:48.760 --> 00:16:52.900 Next item related to 1 21 exclusion. 00:16:53.350 --> 00:16:54.010 That. 00:16:55.000 --> 00:16:58.720 I want to talk about for a minute, because I think a lot of people. 00:16:59.170 --> 00:17:00.430 Also don't think about this one. 00:17:00.430 --> 00:17:04.090 There's a handful of kind of common statements about most things. 00:17:04.720 --> 00:17:06.070 But on this tax code, right? 00:17:06.130 --> 00:17:07.300 It's two out of five years. 00:17:07.300 --> 00:17:08.440 That's what everyone hears. 00:17:08.890 --> 00:17:12.430 And the other thing people say in relation to that, Is that you can 00:17:12.430 --> 00:17:14.200 only use it once every two years. 00:17:14.950 --> 00:17:17.140 And that makes sense on the surface, right? 00:17:17.140 --> 00:17:21.310 If you have to live in something for two years, Then you, how could you do 00:17:21.310 --> 00:17:23.440 this more often than every two years? 00:17:24.790 --> 00:17:29.260 Well, there again is an exception, just like with a lot of other things. 00:17:30.010 --> 00:17:32.470 If you haven't lived in your primary home. 00:17:33.070 --> 00:17:34.810 For that entire two years yet. 00:17:35.530 --> 00:17:40.270 If you've lived in it for say one year, And something comes up that 00:17:40.270 --> 00:17:42.070 requires you to move and sell. 00:17:42.400 --> 00:17:44.200 And it's an unforeseen circumstance. 00:17:44.800 --> 00:17:48.100 If you have to move because of a job related. 00:17:48.670 --> 00:17:49.210 Purpose. 00:17:49.510 --> 00:17:52.000 If your job relocates you across the country. 00:17:52.390 --> 00:17:56.620 Or if there's a medical reason, if you have to move to a different climate, 00:17:56.620 --> 00:18:01.360 because your doctor says you have to, or if you're moving for treatment or 00:18:01.360 --> 00:18:03.010 if it's just something unforeseen. 00:18:03.370 --> 00:18:08.800 One of my favorite cases about this was a couple where they became pregnant and 00:18:08.800 --> 00:18:11.890 they had just bought a condo and then they ended up having like triplets. 00:18:12.310 --> 00:18:15.310 And so that was an unforeseen circumstance because the court was 00:18:15.310 --> 00:18:21.040 like, sure, this 500 square foot condo is not designed to house five people. 00:18:21.280 --> 00:18:22.060 We get that. 00:18:22.930 --> 00:18:24.400 So if you meet one of these. 00:18:24.970 --> 00:18:26.230 Unexpected circumstances. 00:18:26.230 --> 00:18:28.660 Like you're not just selling because you want to you're selling 00:18:28.660 --> 00:18:32.200 because something major changed in life that you hadn't planned for. 00:18:32.950 --> 00:18:36.610 Then you are allowed to use a partial exclusion. 00:18:37.390 --> 00:18:39.490 So what this means is that. 00:18:40.390 --> 00:18:45.040 If at the time this exclusion comes up, like if you have occupied it for one year 00:18:45.100 --> 00:18:49.510 instead of the full two, And your job says, we need you across the country. 00:18:49.510 --> 00:18:50.410 We're sending you there. 00:18:51.370 --> 00:18:57.370 What this means is that instead of the full amount of a $250,000 exclusion, 00:18:57.430 --> 00:19:01.150 if you're a single person you're going to qualify for half as much. 00:19:01.240 --> 00:19:04.000 So you would get $125,000 exclusion. 00:19:05.050 --> 00:19:08.200 A lot of people are fairly familiar with that concept. 00:19:09.310 --> 00:19:13.240 And if you're not, it's a good one to know anytime you're selling a primary home. 00:19:13.780 --> 00:19:17.470 Think about why you're selling and if there's a chance, it falls under 00:19:17.470 --> 00:19:19.060 something that you weren't planning for. 00:19:19.690 --> 00:19:21.010 You could qualify for this. 00:19:21.010 --> 00:19:24.340 If you haven't lived there for two years, always worth looking at always worth 00:19:24.370 --> 00:19:25.780 like digging into it a little more. 00:19:26.890 --> 00:19:32.290 So most people are familiar with the idea that if you have to move before two years, 00:19:32.830 --> 00:19:35.440 You can get that prorated exclusion. 00:19:35.830 --> 00:19:36.640 And. 00:19:37.450 --> 00:19:41.620 You can exclude just a smaller amount of maximum gain, right? 00:19:41.620 --> 00:19:42.730 It doesn't mean your. 00:19:43.630 --> 00:19:44.200 Gain. 00:19:44.860 --> 00:19:46.870 Is by default, partially taxable. 00:19:47.200 --> 00:19:51.370 It just means the total amount of gain that you can exclude is less. 00:19:51.970 --> 00:19:55.060 And it's based on the ratio of two different things. 00:19:55.060 --> 00:19:56.680 There's actually two options for this. 00:19:56.680 --> 00:19:58.870 And this is the part people aren't familiar with. 00:19:59.950 --> 00:20:03.520 So what most people are familiar with is what I just mentioned. 00:20:04.600 --> 00:20:09.190 Which is the number of time you have occupied it. 00:20:09.730 --> 00:20:10.720 Out of two years. 00:20:10.750 --> 00:20:11.020 Right? 00:20:11.020 --> 00:20:13.120 So if you'd been there one year, you get half as much. 00:20:13.450 --> 00:20:15.490 If you'd only been there for six months, you'd only get a 00:20:15.490 --> 00:20:17.140 quarter of the full exclusion. 00:20:17.590 --> 00:20:18.880 So it prorates that way. 00:20:19.810 --> 00:20:20.740 There's a second test. 00:20:20.740 --> 00:20:21.280 You can use. 00:20:22.030 --> 00:20:26.110 So you have to use the smaller of these two tests. 00:20:26.140 --> 00:20:29.950 And that is either the number of months that you've occupied it out of 00:20:29.950 --> 00:20:31.360 the two years you were supposed to. 00:20:31.900 --> 00:20:38.230 Or you can also use the time since your most recent 1 21 exclusion. 00:20:39.700 --> 00:20:44.290 The reason I mentioned, this is, this is something I have seen in, correct. 00:20:44.800 --> 00:20:48.400 By tax prepares most commonly, I think they don't. 00:20:48.850 --> 00:20:52.810 Um, always realize that there's this kind of secondary option because we've 00:20:52.810 --> 00:20:54.580 had these rules drilled into our heads. 00:20:55.090 --> 00:20:59.230 So the core rule is typically you can only do this once every two years. 00:20:59.230 --> 00:20:59.620 Right. 00:20:59.650 --> 00:21:00.040 But. 00:21:01.060 --> 00:21:02.350 If you are moving. 00:21:02.860 --> 00:21:04.720 For an unforeseen reason. 00:21:05.470 --> 00:21:09.610 You can essentially have this come up more than once within a two year window. 00:21:10.300 --> 00:21:12.010 Or even twice in the same year. 00:21:13.120 --> 00:21:13.810 Let's say. 00:21:14.590 --> 00:21:16.690 January of the year, right? 00:21:16.720 --> 00:21:21.100 You sell your primary home that you'd owned unoccupied for years and years. 00:21:21.490 --> 00:21:23.320 And you buy a new primary right? 00:21:23.350 --> 00:21:24.190 Sell the first one. 00:21:24.190 --> 00:21:25.900 You get the full 1 21 exclusion. 00:21:25.900 --> 00:21:28.150 It's tax-free all good to go there. 00:21:29.110 --> 00:21:34.000 Then in November 11 months later, Your job says, oops, sorry. 00:21:34.270 --> 00:21:35.950 We're shipping you across the country. 00:21:36.520 --> 00:21:39.730 And you have to get out there next week. 00:21:41.020 --> 00:21:42.220 You weren't planning. 00:21:42.820 --> 00:21:44.590 To sell this new house you just bought it. 00:21:45.340 --> 00:21:48.970 So, this is a case where you would technically have two 00:21:48.970 --> 00:21:50.770 exclusions in the same tax year. 00:21:50.770 --> 00:21:53.590 You would have to reported on your tax return for that same year. 00:21:54.280 --> 00:21:57.610 That first 1 21 exclusion would be the full amount, right? 00:21:57.610 --> 00:21:59.680 That first house you sold you'd lived in for years. 00:21:59.680 --> 00:22:00.340 You get to sell it. 00:22:00.340 --> 00:22:01.090 No problem. 00:22:02.230 --> 00:22:03.310 The second one. 00:22:04.060 --> 00:22:07.330 Qualifies for a reduced exclusion, right? 00:22:07.360 --> 00:22:10.000 For 11 out of 24 months. 00:22:10.000 --> 00:22:10.390 Worse. 00:22:10.440 --> 00:22:11.370 Of an exclusion. 00:22:12.120 --> 00:22:17.070 And because you have done a 1 21 exclusion pretty recently within the same year. 00:22:17.430 --> 00:22:19.410 That is the test you're going to use. 00:22:20.010 --> 00:22:24.720 So in this case, it would be a look back to that last most recent exclusion. 00:22:24.800 --> 00:22:29.090 A lot of software tells you, you can't do it because on surface level, you can't. 00:22:29.870 --> 00:22:32.510 Unless there's this unforeseen experience. 00:22:32.560 --> 00:22:37.720 And then you might have 2, 1 21 exclusions within the same tax year. 00:22:38.470 --> 00:22:42.370 But again, Because most software by default, doesn't just let you 00:22:42.370 --> 00:22:43.900 do it as kind of a safeguard. 00:22:44.560 --> 00:22:47.470 A lot of people assume they can't do it and they pay the tax. 00:22:48.220 --> 00:22:52.120 If the reason you are selling the house, the second house, if you've 00:22:52.120 --> 00:22:54.130 done a 1 21 exclusion pretty recently. 00:22:54.550 --> 00:22:57.100 And now you're having to sell your newer primary home. 00:22:57.790 --> 00:23:02.050 If it falls under one of those unforeseen circumstances where it's 00:23:02.050 --> 00:23:05.740 either job related or medical or just something you hadn't planned on. 00:23:06.400 --> 00:23:07.630 You can indeed. 00:23:08.290 --> 00:23:10.720 Exclude the gain on that second property. 00:23:11.230 --> 00:23:13.780 It's just going to be a reduced, maximum limit. 00:23:14.320 --> 00:23:16.720 But there are cases where you will have. 00:23:17.350 --> 00:23:20.260 Not only more than one within a two year window, you could 00:23:20.260 --> 00:23:22.450 even have 2, 1 21 exclusions. 00:23:23.080 --> 00:23:24.610 In the same tax year. 00:23:25.630 --> 00:23:30.160 So in summary, if you own and occupy your primary home for two out of 00:23:30.160 --> 00:23:37.660 the most recent five years, Which is actually 730 days out of 1,825 days. 00:23:38.320 --> 00:23:44.560 You get to exclude $250,000 of gain per legal owner. 00:23:44.980 --> 00:23:48.130 So per legal owner who meets that qualification. 00:23:48.970 --> 00:23:52.030 And past that for common mistakes to be cautious of. 00:23:52.600 --> 00:23:56.950 Is if you rent your primary home after you move out of it. 00:23:57.460 --> 00:23:59.350 And you rent it for no more than three years. 00:23:59.380 --> 00:24:03.010 You do not have non-qualified use and you can still qualify for that 00:24:03.040 --> 00:24:04.960 full 1 21 exclusion when you sell. 00:24:05.890 --> 00:24:07.360 The flip side of that. 00:24:07.840 --> 00:24:10.930 If you've had a house that started as a rental and you decide to 00:24:10.930 --> 00:24:12.490 move into it for two years. 00:24:12.940 --> 00:24:17.650 That does not get you a tax-free sale that does not get you the full 1 21. 00:24:18.110 --> 00:24:21.560 any of those years, it was not a primary home before it was. 00:24:22.160 --> 00:24:25.550 The gain related to that number of years will always be taxable. 00:24:26.300 --> 00:24:29.660 The exclusion related to rental use. 00:24:30.620 --> 00:24:31.970 Different for health hacking. 00:24:32.000 --> 00:24:37.100 If it is rooms in your primary home versus different units and 00:24:37.100 --> 00:24:39.050 a small multifamily, you occupy. 00:24:39.770 --> 00:24:44.300 If you are renting spare bedrooms and the same house in which you live as a primary, 00:24:45.020 --> 00:24:49.595 you do not have to prorate that gain the full gain, still qualifies for the 1 00:24:49.595 --> 00:24:51.770 21 exclusion and you can sell tax-free. 00:24:52.820 --> 00:24:54.680 However, if you are renting. 00:24:55.130 --> 00:24:58.280 Three units and a fourplex and you are living in the fourth. 00:24:58.760 --> 00:25:03.830 Then only 25% of your gain would qualify for the 1 21 exclusion. 00:25:04.580 --> 00:25:05.570 And the last note. 00:25:06.080 --> 00:25:08.960 Is that you can only do this once every two years. 00:25:09.280 --> 00:25:12.280 Unless you had an unforeseen circumstance. 00:25:12.670 --> 00:25:15.520 If there was something you didn't plan on happening, you're selling for 00:25:15.520 --> 00:25:17.440 a reason that you hadn't intended. 00:25:17.890 --> 00:25:18.820 Your job moves you. 00:25:18.820 --> 00:25:19.840 There's a medical reason. 00:25:19.840 --> 00:25:21.160 Something just comes up in life. 00:25:21.760 --> 00:25:25.120 Then there's a good chance that you can qualify for a reduced 00:25:25.120 --> 00:25:26.590 amount of maximum exclusion. 00:25:26.704 --> 00:25:31.658 Even if you have used the 1 21 exclusion within the past two years. 00:25:32.288 --> 00:25:34.448 So I know this is a lot of information. 00:25:34.488 --> 00:25:40.398 And if you followed me last year, I did do a 121 days of 1 21. 00:25:40.758 --> 00:25:46.188 Where I posted new content about this topic specifically for 121 days in a row. 00:25:46.608 --> 00:25:48.198 I'm going to do something similar this year. 00:25:48.198 --> 00:25:49.548 So keep an eye out for that. 00:25:50.088 --> 00:25:53.298 And again, I want to let you guys know that before you do anything we 00:25:53.298 --> 00:25:57.378 talk about in this show, you should talk to your tax professional. 00:25:57.678 --> 00:25:59.538 Well, I am a tax strategist. 00:25:59.568 --> 00:26:01.398 I am not your strategist. 00:26:01.708 --> 00:26:04.858 I am so appreciative of you guys joining me today. 00:26:04.858 --> 00:26:08.885 I can remember to subscribe and I will talk to you again next week.