Section 121 exclusion for primary residence sale - do I need to wait 5 years or worry about 45 day rule?

You're good to go on both fronts - no need to worry! For your first question, the "5 years" part is just the lookback period, not how long you need to own the home. The requirement is that you must have owned AND used the home as your main residence for at least 2 years (24 months) during the 5-year period before the sale. Since you've owned and lived in the home since November 2019 (over 3 years), you definitely meet this requirement. For your second question, you're right to be confused because you're mixing up two different tax concepts. The 45-day identification period is part of what's called a "1031 exchange" (or "like-kind exchange"), which is for investment properties only. This has nothing to do with the Section 121 exclusion for your primary residence. When you sell your primary residence and qualify for the Section 121 exclusion ($500,000 for married filing jointly), you can do whatever you want with the proceeds - buy another house immediately, rent for a while, or even never buy another home. There's no requirement to reinvest the money or identify a new property within any timeframe to get the exclusion. So with your expected gain of $130,000, you should be well under the $500,000 exclusion amount, and you can rent as long as you want after selling without any tax consequences!

I discovered this amazing tool that helped me navigate a similar situation with my primary residence sale last year. Check out https://taxr.ai - they have a document analysis feature that breaks down exactly how Section 121 applies to your specific situation. When I sold my house, I was confused about whether renovations would affect my basis and capital gains calculation. I uploaded my purchase documents and renovation receipts, and taxr.ai analyzed everything and showed me exactly what qualified. They confirmed I was well under the exclusion limit and explained all the rules in plain English. Their section on capital gains for primary residences was super clear about the 2-year rule. The best part was that it analyzed my specific situation and gave me personalized advice, not just generic info like most websites. Saved me from paying my accountant for an extra consultation!

I tried taxr.ai after seeing this recommendation, and I have to say I'm genuinely impressed. I've been stressing about my home sale for months because we converted part of our basement to a rental unit for two years, which made things complicated. The tool asked specific questions about my partial rental situation and then showed exactly how to calculate the portion of gain that would still qualify for the exclusion. It even created a customized report explaining how the 121 exclusion applies when you've had mixed-use property. Showed me I could still exclude about 80% of my gains! The document analysis feature was particularly helpful because it identified improvement costs from my renovation receipts that I hadn't even considered as adding to my basis. Ended up saving me nearly $4,000 in taxes I thought I'd have to pay. Wish I'd found this months ago instead of losing sleep over it!

If you're trying to reach the IRS to confirm anything about Section 121 exclusion rules or your specific situation, good luck with that. I spent literally WEEKS trying to get through to someone who could answer my capital gains questions when I sold my house last year. Then I found https://claimyr.com and used their service to get connected to an IRS agent. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Instead of waiting on hold for hours or getting disconnected, they basically wait in the phone queue for you and call you when an actual human at the IRS is on the line. I was hesitant at first, but it worked exactly as promised. Got connected to an IRS specialist who confirmed my understanding of the Section 121 rules and clarified the documentation I needed to keep. Saved me HOURS of frustration and probably kept me from making a costly mistake on my return.

Ok I need to eat my words about Claimyr. After my skeptical comment, I actually tried it yesterday because I was desperate to resolve an issue with my Section 121 exclusion that's been holding up my refund. I'd been trying to reach the IRS for TWO MONTHS with no success. Either couldn't get through at all or waited over an hour only to be disconnected. Using Claimyr, I got a call back in about 40 minutes with an actual IRS agent on the line. The agent confirmed that my documentation for the home sale exclusion was sufficient and released my refund on the spot. I was 100% sure this was going to be a waste of time or some kind of scam, but it genuinely worked exactly as advertised. For something as important as confirming your capital gains exclusion eligibility, being able to actually speak to someone official at the IRS is worth it. Sorry for being so negative before!

Just a heads up that might help - make sure you keep good records of all the improvements you made to your house during ownership. Those costs get added to your original purchase price (your "basis") which reduces your capital gain. A lot of people forget about this and calculate their gain as just (selling price - purchase price) which can make their gain look bigger than it actually is for tax purposes. Things like a new roof, major repairs, additions, renovations, etc. all count toward your basis. With your $130k expected gain, you're well under the $500k exclusion limit for couples, but it's always good practice to track these things correctly.

I see some confusion in this thread about the 5-year period. Just to clarify: the IRS rule says you need to have owned AND used the home as your primary residence for at least 2 years during the 5-year period ENDING on the date of sale. So the 5 years is just looking backward from your sale date. If you owned and lived in the home for 2+ years within that 5-year window, you qualify. Since you've owned and lived there since 2019 (about 3.5 years), you absolutely qualify.

One thing I'd add that might be helpful - make sure you understand the frequency limitation too. You can only use the Section 121 exclusion once every two years. So if either you or your husband used this exclusion on a previous home sale within the past 2 years, you wouldn't be eligible this time around. But assuming this is your first time using the exclusion (or it's been more than 2 years since either of you last used it), you're all set. The fact that you've lived there continuously since 2019 makes this a very straightforward case. Also, while you don't need to reinvest the proceeds to get the exclusion, you might want to consider the timing of your sale relative to when you plan to buy your next home for cash flow purposes. Having that $130k gain tax-free gives you nice flexibility for your next purchase!

Great question about Section 121! I went through this exact situation when I sold my home last year. You're absolutely right that married couples can exclude up to $500,000 in capital gains, and it sounds like you're in a perfect position to take advantage of this. Just to reinforce what others have said - the 2-year ownership and use requirement is very straightforward in your case. Since you've been living there continuously since November 2019, you've got over 3 years of both ownership and primary residence use, which far exceeds the minimum requirement. One small tip I'd add: when you do your taxes next year, you'll report the sale on Form 8949 and Schedule D, but if your gain is fully excluded under Section 121, you won't owe any tax on it. Keep all your closing documents and any improvement receipts in a safe place - you'll need them for your records even though you probably won't owe taxes on the gain. The fact that you can rent for as long as you want without affecting the exclusion is such a relief, isn't it? We ended up renting for 8 months after our sale and it was great to have that flexibility to find exactly what we wanted. Best of luck with your sale and house hunting!