United States
Hong KongProperty transactions: exclusions, exchanges and installment sales
A primary residence sale can exclude USD 250,000 of gain, or 500,000 for a couple, subject to ownership and use tests. Like-kind exchanges defer gain on real property held for business or investment. Installment sales spread gain across years.
Three techniques and one recapture rule that undoes part of the benefit.
The primary residence exclusion
Exclude up to USD 250,000 of gain, or 500,000 for a married couple filing jointly.
- Owned the home for at least two of the last five years.
- Used it as a principal residence for at least two of the last five years.
- Not used the exclusion on another home in the previous two years.
- For the full 500,000, both spouses meet the use test and either meets the ownership test.
The two periods do not have to be continuous, and they do not have to be the same two years. A partial exclusion is available where the sale is due to a change in employment, health, or unforeseen circumstances.
The like-kind exchange
Real property held for productive use in a trade or business or for investment can be exchanged for other such real property with gain deferred.
Personal property no longer qualifies. Neither does a personal residence, inventory, or securities.
| Requirement | Rule |
|---|---|
| Identify replacement property | Within 45 days of transferring the relinquished property |
| Complete the exchange | Within 180 days, or the tax return due date if earlier |
| Qualified intermediary | Required - the taxpayer must not receive the proceeds |
| Boot | Cash or non-like-kind property received is taxable to the extent of gain |
Forty-five and 180 days. Those two numbers appear in questions more reliably than anything else in this topic.
A like-kind exchange defers gain by carrying basis into the replacement property. Held until death, the deferred gain is eliminated by the step-up - which is why exchanges are chained across a lifetime.
Installment sales
Receiving payments across more than one tax year spreads the gain, recognized as payments are received using a gross profit percentage.
It can keep a seller in a lower bracket, reduce exposure to the net investment income tax, and provide income. It also concentrates credit risk on the buyer, and depreciation recapture is recognized entirely in the year of sale regardless of when cash arrives.
Depreciation recapture
Depreciation taken reduces basis, which increases gain on sale. Part of that gain is recaptured at less favorable rates.
For real property, unrecaptured section 1250 gain is taxed at up to 25 per cent rather than the normal long-term rate. For personal property, section 1245 recapture is taxed as ordinary income.
A client who has depreciated a rental for twenty years is facing this, and a projection that ignores it understates the tax substantially.
Dollar limits and rate thresholds here are indexed annually and several were changed by the 2025 reconciliation act. Confirm the current figure against the IRS before relying on it.
Common questions
How much gain can you exclude on a home sale?
Up to USD 250,000, or 500,000 for a married couple filing jointly, subject to owning and using the home as a principal residence for two of the last five years.
What are the like-kind exchange deadlines?
Replacement property must be identified within 45 days of transferring the relinquished property, and the exchange completed within 180 days or by the return due date if earlier.
Does a 1031 exchange work for personal property?
No. Like-kind exchange treatment now applies only to real property held for business or investment. Personal residences, inventory and securities do not qualify.
What is an installment sale?
A sale with payments received across more than one tax year, spreading the gain using a gross profit percentage. Depreciation recapture is still recognized entirely in the year of sale.
What is depreciation recapture?
Depreciation reduces basis and increases gain on sale. Unrecaptured section 1250 gain on real property is taxed at up to 25 per cent; section 1245 recapture on personal property is ordinary income.