Tax-Free Exclusion on Sale of Primary Residence Reduced If Use Is Other Than Home

In order to qualify for domestic partnership in California it is required that my partner and I have the same primary residence. Fifteen years ago when we first got together we both owned our own homes. Neither one has ever been rented.  We spend about equal time living between the two houses. Can we claim dual primary residences? We are together all of the time which satisfies the intent of the law, however I vote in my area and she hers etc.  If we quit claimed 50% of each residence to each other would that solve the problem?

Thank you in advance.

c. crockett

I have a question about depreciation recapture and how that plays with the new rules.  I bought a house for 50K, rented it for 14 years, depreciated ~23K, sold it for $100K.  I did a 1031 exchange with it for another property, rented it for 3 years, moved into it in 2007 (and lived in it for 2 years). When I sell this house as my primary residence do I need to be concerned about depreciation recapture tax for the $23K depreciation (or the depreciation taken on the 2nd house)?   

When you sell a property that was originally the result of a 1031 exchange 5 years ago, was rented out for the first year, and then occupied by us for four years (meeting all of the 121 and 1031 rules), do we jeopardize the $500K exclusion at all by assisting the buyer with any seller financing? We're not sure that will be necessary, but we wanted to explore how it might affect our situation.

We purchased our home in 1976 and lived there until 2006.   At that time, we rented the house out and moved into a rental property.   We are now moving back to the original primary home and plan to live there for 2 years prior to placing up for sale.   Where do we stand with regard to this new tax law and its penalties.   

I've read the above threads and links (esp. RE how the Housing and Economic Recovery Act of 2008 Modifies Section 121), and I'm still quite confused; can you perhaps offer some guidance?

My wife and I became "snowbirds" on 1/1/99, buying a FL condo apartment for $200,000 and making it our primary residence (domicile) as of 1/1/99.  Additionally, I've use(d) ~25% of the apartment as a "home office" and have taken a Form 8829 deduction since (calendar) tax year 1999. We still own our New England house where we live 5 months/year and the other 7 in FL. 

On ~2/1/2010 due to damages caused to our apartment which are still unrepaired (irrelevant, unless the 121 exception for unforeseen circumstances applies), we were "forced" to purchase another dwelling (house v. apt.) and decided to (and took the $6500 homebuyer credit) instead make that our primary residence. 

We want to sell the apartment ASAP once repairs are completed; however, we are confronted with at least 2 dilemmas. 

First, if I understand Section 121 correctly, we will lose our $500,000 121 exclusion if we do not sell before 6/1/11 (i.e., 2/1/06 through 1/31/11 = 28 of prior 60 months; 2/1/06 through 5/31/11 = 24). 

Second, given current market conditions and without major repairs / renovations, what could have brought us say $700,000 a few years ago (and I believe no [long term] capital gain, except for either the 25% home office portion or whatever portion is calculated on the recapture of my 8829 deductions) would likely now net us $300,000 or possibly less.

One solution I've read about is selling the apartment to someone (preferably not a family member...?) for say $400,000 or $350,000 (the latter being the lowest sales price comparable apartments have recently been fetching), and, after say 1 month, buying the unit back and holding it as "investment" property or as rental property, thereby benefiting from at least some of the 121 exclusion and, upon eventual sale, paying only (short? long? term cap gains on the new (repurchase price) cost basis.  However, this strikes me as a bit of a "sham" that the IRS might "frown upon." 

Another solution seems to lie in the various threads I've tried to follow, but I don't read H.R. 3221 as supporting this solution - i.e., converting (however one documents that act) the property prior to 6/1/11 (or perhaps ASAP - I'm not sure which scenario is better, assuming this is a solution) to rental property, and upon the sale or 1031 exchange of the property, still being able to claim the 121 exclusion in proportion to the time held as primary residence v. rental.  If at all a solution, it would seem I still have to sell prior to 6/1/11 if the 5 months/year in New England is taken into account, or within 3 years of the "conversion" or . . . ? 

I.e., any thoughts / suggestions?  I'm getting more confused as I think about all this...

I have a question on what date is used to determine if a home owner falls in the cap gains excusion window.  I have owned a property for a number of years. I moved out of the apartment December 1, 2007 and have been renting it out coming up on 3 years.  Its now on the market and i hope to have it sold in the next month (so i would be under the 2 of the 5 year window to qualify for the cap gains exclusio).  Is the date that i would qualify for the exlusion based on the date that i close on the house or is it based on when i have a contract? Do i have to have it sold by the end of November 31st? Or just have a contract in which i have the closing date scheduled? And if i don't sell it, can i move back in and make it my primary home, even if its just for a month?

Thanks

Hi Bill,

Reading the prior postings and your comments, I have a scenario that I don't think is precisely addressed. I'd appreciate your thoughts on this: A couple owns and lives in a home in State A as their principle residence from July 1, 1997 to July 1, 2009 (12 years). Then they move temporarily to State B to attend graduate school, where they rent but do not purchase a home. They do not sell their home in State A, because they intend to move back into it when they return from grad school. Instead, they rent their home to another couple from July 1, 2009 to June 1, 2012 (just under 3 years), at which point the renters move out. However, the owners are still in grad school in State B, where they are still renting a home. However, they would like to purchase a home in State B because they are tired of renting. But, they can't afford to purchase a home in State B unless they sell their home in State A. So, they put their home on the market intending to sell it only if they can get a good price; otherwise, they intend to keep it BUT NO LONGER RENT IT OUT, and move back into it once they finish grad school. The home sells on January 1, 2013. They do not purchase a home in State B until July 1, 2013.

Do they qualify for the (prorated) Sec. 121 exclusion?   As of June 30, 2012 (when the home ceased being used as a rental), the couple had lived in the home for 2 of the preceding 5 years. My question is whether time the home sat on the market from June 30, 2012 until January 1, 2013 deemed a non-qualifying use, such that the couple no longer qualifies under the Sec. 121 exclusion?

Thanks!

Thanks, Bill. I'm curious why the IRS would consider the home a secondary home while it's vacant and on the market (per the above scenario). If the couple is out of state because of school, and is simply renting a place temporarily in State B, why wouldn't their home in State A be considered their principle residence? Does merely renting it out for a few years change the character of the property? This seems pretty punitive for people who need to move away for a few years for business or school or perhaps a family emergency. This seems to mean that you have to let your home sit vacant and not rent it out while you're out of state. (Or maybe that is a non-qualifying use, too?). I don't understand this, and it doesn't seem fair. These are not situations where people are trying to avoid taxes by moving from one property to another and renting them out to make more money.

Thanks for your insights,

Bob

P.S., is there an IRS memo or opinion or something that explicitly addresses this issue?

Hi Bill,

At the top of your blog page you have a section title "Primary Residences Vacated" that says, "The mere fact that the homeowner moved out and left the property vacant or rented it out will not trigger the non-qualified use provisions and the homeower will still be able to use the entire 121 exclusion provided they still meet the other 121 exclusion requirements"  I don't think I understand that, given the previous discussion, where it seems clear that vacating and renting a property do in fact trigger the non-qualified use provisions, and do in fact limit the amount of the exclusion. Can you clarify this for me?

Thanks,

Scott