Which statement is correct regarding the Section 121 exclusion?

The correct understanding of the Section 121 exclusion focuses on the conditions under which a taxpayer can exclude gains from the sale of their principal residence from taxation. Specifically, the rules allow an exclusion of up to $250,000 of gain for single filers and up to $500,000 for married couples filing jointly, provided the residence has been owned and used as the taxpayer's principal residence for two out of the last five years prior to the sale.

The statement regarding the exclusion not being usable if the residence was acquired in a like-kind exchange within the last five years is not accurate. A like-kind exchange allows for the deferral of gain recognition on exchanged properties, and the Section 121 exclusion can still be applicable when the residence sold is fully eligible based on the ownership and use tests.

Looking at the other options provides further clarity on the Section 121 exclusion. The limitation on using the exclusion only once every three years reflects a common misconception, as taxpayers can generally use the exclusion again after the required ownership and use period, regardless of how often they sell their residences, assuming they meet the criteria again. The unified exclusion amount of $250,000 for married couples is incorrect because they actually qualify for up to $500,000. Lastly, the