Primary Residence Conditions
I have rented out an older SFH of mine for over 15 years. I have purchased and lived in another home in the same local area for over 12 years. I am considering selling the rental house in the next 2-6 years.
I would like to better understand the criteria for establishing this house as my 'Primary Residence' in order to qualify for the capital gains tax exemption (PR for two out of five consecutive years).
I have not easily found any IRS criteria or discussion on what exactly a PR is. I may be travelling so much in my upcoming job that I rent out my existing home as well. Can I declare the older house as my PR then? Thanks in advance.
Hi Beachwalker,
I have been told that your PR is the one where you actually reside as well as listed for official documents, license, mail etc.
I also heard that you only have to reside there for one (1) year for capital tax gain purposes however you would have to reinvest in a house of equal or greater value to no be penalized......unless you live in it for 2 years, then you can pocket
the money.
I maybe wrong but this is my understanding. Any CPA's out there.....we are listening.......lol
jeff
Quote:... you would have to reinvest in a house of equal or greater value to no be penalized......unless you live in it for 2 years, then you can pocket
the money. NC_Yank (Jeff),
The primary residence rollover replacement rules were eliminated in 1997 when the new two year rules came into effect.
Also, to exclude the profit on the sale of a primary residence, the taxpayer must have owned AND occupied the property as his primary residence for an aggregate of two of the five years prior to sale. There is no requirement for the two years to be consecutive. Nor, is there a requirement that the two years of ownership coincide with the two years of occupancy.
Thanks Dave,
So much for telling my wife we can move every year.........lol
[I would like to better understand the criteria for establishing this house as my 'Primary Residence' in order to qualify for the capital gains tax exemption (PR for two out of five consecutive years).
I have not easily found any IRS criteria or discussion on what exactly a PR is. I may be travelling so much in my upcoming job that I rent out my existing home as well. Can I declare the older house as my PR then? Thanks in advance.]
You probably can't find any criteria of what is considered a PR because Section 121 of the Internal Revenue Code nor its regulations define "primary residence." (Section 121 deals with the $250,000 or $500,000 gain exclusion on your primary residence). Also, I am unaware of any IRS Revenue Ruling or Revenue Procedure that defines personal residence.
Factors that were mentioned above by one of the posters does indicate personal residence, but they are not conclusive.
I think it is easier to define what is not a personal residence. If you rent the house out for more than 14 days in a year, the IRS will likely argue that the property is not a personal residence. Also, if you are claiming depreciation on all of the property, the IRS will argue that the house is not your personal residence. This said, JohnMichael correctly points out that Section 121 does have a 2 out of 5 year rule to qualify. You have to have lived in the house and used it as your primary residence for 2 out of 5 years. The IRS will look on this on a tax year by tax year basis, so if your last 5 tax returns indicate you have rented the property for some of the year in each of those five years, you will likely not qualify even though you may have used the property for some time in each year. I think the IRS will likely argue that you need to have used the property for 2 full years, although that may be challengeable if you are willing to fight the IRS on that issue in audit and possible litigation.
Hope that helps,
Taxjunkie
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Thanks to Dave T and taxjunkie for their excellent replies.
A followup example question:
The current tenants move out of the older house I have rented for years and I move in, changing my address, registrations, etc to this residence. Meanwhile I still keep my current home which I have lived in for over 10 years and do not rent it out. For convenience due to work commuting, I end up spending nights in both places, while considering the older home as my PR. It appears that after 2 years, I may elect to sell the older home and exclude up to 250k (single) in capital gains.
I am also then eligable to exclude up to 250k (single) in capital gains should I sell my newer home since I had lived in this home as my PR for 3 years of the prior 5 years, prior to moving into the older rental property for 2 years.
beachwalker,
Qualifying for the capital gains exclusion does not need to be as complicated as you want to make it.
With respect to your current primary residence, you can move out today and sell the property anytime between today and three years from today and still qualify for the capital gains exclusion. By owning and occupying the property for at least two years of the five years prior to sale, you are entitled to claim the capital gains exclusion on the sale of your current primary residence -- as long as you close settlement on the sale within the three year window after vacating the property.
During this three year window, you do not have to leave the property vacant, nor do you have to periodically live between houses. You can even rent out your former primary residence, claim a depreciation expense and other operating expenses to offset your rental income, and still qualify for the capital gains exclusion on the sale. You will have depreciation recapture to contend with, but you still come out ahead if your tax bracket is 27% or higher.
Once you have sold your (former) primary residence you may not take another capital gains exclusion for 24 months. Let's say you move out of your current primary residence on May 15, 2003 and move into your rental property. You rent out your old house for two years, and sell it to your tenant on June 15, 2005. You take the capital gains exclusion on your 2005 tax return.
Meanwhile you have converted your former rental property into your primary residence and have owned and occupied this property as your primary residence for over two years, when you decide to sell it. Because you took the capital gains exclusion for the property you sold on June 15, 2005, you will not be eligible to take advantage of the exclusion again until June 15, 2007. In this example, if you sell your new primary residence before June 15, 2007, you will have to pay capital gains taxes in addition to depreciation recapture.
Hope this clears up the situation for you.
In regards to this discussion about primary residence and capital gains exemptions, someone had mentioned that all that was needed is for official documents, mail, and one's license to list the address inquiring about a capital gains exemption and that this would have to be for two years within a five year period. With that said, would just having one's mail sent to the address for 2 years suffice for the IRS? The reason I ask is because I am contantly outside of the U.S. on business, far more than I am in the U.S., but my mail still gets sent to my home.
Thanks,
Matt
ProvoHydro,
The IRS general rule for qualifying for the capital gains exclusion on the sale of your primary residence, is that you must both OWN and OCCUPY the property as your primary residence for an aggregate period of at least two of the five years immediately prior to the sale.
The other things listed (including receiving mail) are things a reasonable person does who establishes a domicile as his primary residence, but these things alone are not sufficient to qualify for the capital gains exlcusion on the sale of your primary residence.
When someone has more than one domicile, these other things can be taken into consideration in determining which property is an individual's primary residence.
In your situation, I would write the IRS and ask for a determination -- a private letter ruling for your situation. Since your job requires you to spend significant time out of the country, you want to know if you are still considered as occupying your US home during these extended periods of (temporary) absence.
Your situation is similar to the US military. Servicemembers who own a home, but are given orders to serve overseas for three or more years will often convert their home to a rental just in case the military brings them back to the same location. Upon returning to the US, they may not be stationed at the same location. To add to their financial woes, the servicemembers who then decide to sell their former homes, find that they do not qualify for the capital gains exclusion once three years has elapsed from the time they vacated their former home. At this time, Congress will need to make a change to the tax codes to remedy this problem for our servicemembers.
how do these rules apply to 2ndary residences?
supposing i have a home thats my 2ndary residence. i haven't been living in it full time nor have i rented it out. if i sell after 2 years, do i have to pay capital gains on it?
Short answer, Yes.
If you held the property for less than one year, then the short term capital gains tax rate is the same as your ordinary income tax rate. If held longer than one year, then the long term capital gains tax rate applies.
Nice try but no no!!!!!
Ya get one house per customer on that rule
per the time requirement.
I would clearly insure> put whatever house you want as PR as your address on your tax return for 2 yrs and also utilities and address of your drivers license and also other mail crap>especially your account statements which the IRS gets!!!!!!
That way there is NO way the IRS can then say during an audit we do not buy this> because now you have proof > bills, account statements the works in the address of the PR
You then have ALOT OF PROOF.
I know people that sell Large apartment buidlings 1031 that money into a BIG house then rent it for a few yrs and YEP PR that house later on.
After 2 yrs they sell it with 500k gains tax free. Sometimes they do not EVEN live in it but every piece of thier mail goes there!!!!
Every 2 yrs they do this.
SKI
Quote:Sometimes they do not EVEN live in it but every piece of thier mail goes there!!!!
Every 2 yrs they do this.
skidoddle,
Who are these people? Do you have their SSNs?. Let's turn them in and collect a big reward when these people are convicted of tax evasion.
You are proposing a game of tax audit roulette. Congress (in section 121 of the tax code) clearly says that the homeowner must both OWN and OCCUPY the property as a primary residence as a condition of the capital gains exclusion. To do otherwise, is banking on the IRS failing to discover your fraud, AND banking on some disgruntled friend, lover, or former employee failing to turn you in.