Primary Residence Tax Exemption qualification question


P

pq

I solely purchased a home in 2003.

Then I got married and later we purchased another home in August 2009
but, due to slow renovations, we moved to it much later, in March 1
2010.

After the move we rented out the first house. BTW, I partially rented
out that house (a couple of rooms) before that for a number of years,
if this is relevant at all.

Now the tax question:

Now I'd like to sell that first house. I expect a substantial profit.
Do I qualify for the primary residence exemption on the capital gains
if the sale happens after August 2012 (but before March 2013)?

Thanks,
Peter
 
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A

Arthur Kamlet

I solely purchased a home in 2003.

Then I got married and later we purchased another home in August 2009
but, due to slow renovations, we moved to it much later, in March 1
2010.

After the move we rented out the first house. BTW, I partially rented
out that house (a couple of rooms) before that for a number of years,
if this is relevant at all.

Now the tax question:

Now I'd like to sell that first house. I expect a substantial profit.
Do I qualify for the primary residence exemption on the capital gains
if the sale happens after August 2012 (but before March 2013)?

Since you and your spouse lived in the house as your main home, and
one of you also owned as your main home, for at least two of the five
years before its sale, and assuming spouse did not use Sec 121 exclusion
in the two years before sale, then Sec 121 exclusion is jointly
available to you.


That would amount to the gain, or $500,000, whichever is less, but you
must add back into gain all the allowed or allowable depreciation during
its time as residential rental property.
 
A

Alan

Since you and your spouse lived in the house as your main home, and
one of you also owned as your main home, for at least two of the five
years before its sale, and assuming spouse did not use Sec 121 exclusion
in the two years before sale, then Sec 121 exclusion is jointly
available to you.


That would amount to the gain, or $500,000, whichever is less, but you
must add back into gain all the allowed or allowable depreciation during
its time as residential rental property.
This answer is not correct as it would lead one to believe that all of
the gain can be excluded if after adding back the allowed or allowable
depreciation the gain was still under $500K. In fact, the computation
for computing how much of any gain is eligible to be excluded is more
complicated as it considers the total number of days of disqualified use
(all days after 12/21/08 when Congress changed the law) over the total
number days the home was owned as well as the depreciation (which by the
way is subtracted from the gain)to determine the amount of eligible gain
that must be adjusted for the disqualified use.

Effectively, you can't exclude gain attributable to the rental period.

All of this is explained with an example on pages 15 and 16 of IRS pub 523.
 
A

Arthur Kamlet

This answer is not correct as it would lead one to believe that all of
the gain can be excluded if after adding back the allowed or allowable
depreciation the gain was still under $500K. In fact, the computation
for computing how much of any gain is eligible to be excluded is more
complicated as it considers the total number of days of disqualified use
(all days after 12/21/08 when Congress changed the law) over the total
number days the home was owned as well as the depreciation (which by the
way is subtracted from the gain)to determine the amount of eligible gain
that must be adjusted for the disqualified use.

Effectively, you can't exclude gain attributable to the rental period.

All of this is explained with an example on pages 15 and 16 of IRS pub 523.
Alan,

I assumed from the OP description that the old home was lived in for years
and then in March 2010 OP moved to a new home, and changed the use of the
old house to rental.


Since the whole NonQualified use rules were to prevent someone from
renting a home for many years, then moving into it as a main home
fo just two years and excluding the full gain less depeciation expense,
the new rules reduced the exclusion amount when that occurred.


But in this case, the use was originally as main home, and when
they moved out and turned it into a rental, the rental use
after moving out of their main home is Not a period of NonQualified
use. Since there was no NonQualifying use once they moved out of their
main home and turned it into a rental, there's no adjustment made to the
exclusion amount.


Now I've reread the OP again and it mentions renting rooms. Here, if
the room rental occurred while it was still a main home and after
12/31/08, I agree with you, there would have to be an adjustment made
to the exclusion amount. And I suspect a relatively small adjustment.
 
P

Phil Marti

Now I'd like to sell that first house. I expect a substantial profit.
Do I qualify for the primary residence exemption on the capital gains
if the sale happens after August 2012 (but before March 2013)?
March 2013. You look back from the date of sale. Purchase of your current home is totally irrelevant.

It's not clear from your post whether both you and your spouse would meet the use test for exclusion. While only one of you must own the property for the required time, both of you must use it as your primary residence for 2 of the 5 years preceding the sale for the full $500,000 exclusion of qualified gain to apply.

As for the discussion about how to figure the gain, Art's correct about the use rules. See Pub 523.

Phil Marti
VITA/TCE Volunteer
Clarksburg, MD
 
A

Alan

Alan,

I assumed from the OP description that the old home was lived in for years
and then in March 2010 OP moved to a new home, and changed the use of the
old house to rental.


Since the whole NonQualified use rules were to prevent someone from
renting a home for many years, then moving into it as a main home
fo just two years and excluding the full gain less depeciation expense,
the new rules reduced the exclusion amount when that occurred.


But in this case, the use was originally as main home, and when
they moved out and turned it into a rental, the rental use
after moving out of their main home is Not a period of NonQualified
use. Since there was no NonQualifying use once they moved out of their
main home and turned it into a rental, there's no adjustment made to the
exclusion amount.


Now I've reread the OP again and it mentions renting rooms. Here, if
the room rental occurred while it was still a main home and after
12/31/08, I agree with you, there would have to be an adjustment made
to the exclusion amount. And I suspect a relatively small adjustment.
First off... I misinterpreted the original post. There is no gain to
exclude because a taxpayer can only have one main home (a person could
also have no main home). In this instance, the property to be sold is
not the taxpayer's main home. As such, it is irrelevant as to the who,
what, where and when of past usage as no exclusion is available. The
taxpayer is going to sell what he refers to as his first house, not the
house he is using today as his main home. The only way to get an
exclusion on the first house is to move back into it and establish it as
one's main home before selling it. Then, one could use the rules I
promulgated.
 
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S

Seth

Alan said:
First off... I misinterpreted the original post. There is no gain to
exclude because a taxpayer can only have one main home (a person could
also have no main home). In this instance, the property to be sold is
not the taxpayer's main home. As such, it is irrelevant as to the who,
what, where and when of past usage as no exclusion is available. The
taxpayer is going to sell what he refers to as his first house, not the
house he is using today as his main home.
Where does the Income Tax Code refer to "main home"?

If a property is lived in for two of the 5 preceeding years, and owned
for 2 of the 5 preceeding years (not necessarily the same years), then
the exclusion applies unless something else (e.g. use of the exclusion
on another property too recently) prevents it.
The only way to get an
exclusion on the first house is to move back into it and establish it as
one's main home before selling it. Then, one could use the rules I
promulgated.
Under your rules, nobody could ever get the exclusion unless he sold
the house he was currently living in out from under himself. That
isn't the case; people move out, then sell and get the exclusion
(provided they sell soon enough).

Seth
 
S

Stuart A. Bronstein

Where does the Income Tax Code refer to "main home"?
It doesn't. The operative phrase is actually "primary residence."
While the term is not specifically defined, there are special
situations that are included as "primary residence" that might not be
intuitively guessed, in §121 of the Tax Code.
If a property is lived in for two of the 5 preceeding years, and
owned for 2 of the 5 preceeding years (not necessarily the same
years), then the exclusion applies unless something else (e.g.
use of the exclusion on another property too recently) prevents
it.
No, it also has to be the taxpayer's primary residence. If it's a
vacation home the exclusion does not apply. There are other
restrictions as well.

___
Stu
http://DownToEarthLawyer.com
 
A

Alan

Where does the Income Tax Code refer to "main home"?

If a property is lived in for two of the 5 preceeding years, and owned
for 2 of the 5 preceeding years (not necessarily the same years), then
the exclusion applies unless something else (e.g. use of the exclusion
on another property too recently) prevents it.


Under your rules, nobody could ever get the exclusion unless he sold
the house he was currently living in out from under himself. That
isn't the case; people move out, then sell and get the exclusion
(provided they sell soon enough).

Seth
See... this is what happens when you reply before having your morning
caffeine jolt. Of course your right. All that is required is that you
meet the 730 day usage and ownership periods when looking back 5 years.
You are not allowed to exclude any of the gain attributable to allowable
depreciation after 5/6/97. After subtracting the allowable depreciation
from the overall gain and if left with a gain, the exclusion is figured
on that gain after one considers the nonqualified usage. There is an
example of this in the JCT explanation of the 2008 tax act that made the
change. See page 62 of:
http://www.jct.gov/x-63-08.pdf
 
R

removeps-groups

Since you and your spouse lived in the house as your main home, and
one of you also owned as your main home, for at least two of the five
years before its sale, and assuming spouse did not use Sec 121 exclusion
in the two years before sale, then Sec 121 exclusion is jointly
available to you.
If the spouse did use 250k in the last two years, then the original poster
can only exclude 250k, not 500k, right?

Also, pleasen note that the 500k exclusion cannot be used to wipe out
depreciation. That has to be paid.
 
P

Peter

(Original poster here)

Thank you for all the answers so far.

1) My profit is going to be less than $250 (and, BTW, furthermore my wife didn't have a property of her own) so any concerns beyond that are entirely irrelevant.

2) The date of buying the new house is entirely irrelevant, what's relevant is when we moved. So I have time to sell until March 2013 to take advantage of the exemption.

3) Now, regarding partially renting out rooms and this affecting the taxation of the gains.

I just read Pub 523:

www.irs.gov/pub/irs-pdf/p523.pdf

In my understanding, I can take full advantage of the exemption (deprecation amount being entirely separate matter) because I only rented out rooms which are in no way separated from the house. In other words we shared the house. Kitchen, dining, laundry, everything.

Take a look at page 16: "Part of Home Used for Business or Rental" (what
I had) vs "Separate Part of Property Used for Business or Rental" on the
next page. In the latter case, I have to divide the gains between primary and rented out portion, in the former case (which is my case, since I only rented
out rooms) I don't and I take full advantage.

Can people here confirm this please?
 
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A

Arthur Kamlet

(Original poster here)

Thank you for all the answers so far.

1) My profit is going to be less than $250 (and, BTW, furthermore my
wife didn't have a property of her own) so any concerns beyond that are
entirely irrelevant.

2) The date of buying the new house is entirely irrelevant, what's
relevant is when we moved. So I have time to sell until March 2013 to
take advantage of the exemption.

3) Now, regarding partially renting out rooms and this affecting the
taxation of the gains.

I just read Pub 523:

www.irs.gov/pub/irs-pdf/p523.pdf

In my understanding, I can take full advantage of the exemption
(deprecation amount being entirely separate matter) because I only
rented out rooms which are in no way separated from the house. In other
words we shared the house. Kitchen, dining, laundry, everything.

Take a look at page 16: "Part of Home Used for Business or Rental" (what
I had) vs "Separate Part of Property Used for Business or Rental" on the
next page. In the latter case, I have to divide the gains between
primary and rented out portion, in the former case (which is my case,
since I only rented
out rooms) I don't and I take full advantage.

Can people here confirm this please?

I believe the Pub 523 discussion you are discusing is about how
to treat the sale. It is telling you there is no need to allocate
te sales proceeds between rental and pesonal home.


The issue Alan raised is whether you need to include an allocated
portion of the home (the rented rooms) when calculating a "period
of nonQualifying use after 12/31/08."
 
P

Peter

(Original Poster again)
I believe the Pub 523 discussion you are discusing is about how
to treat the sale. It is telling you there is no need to allocate
te sales proceeds between rental and pesonal home.
The issue Alan raised is whether you need to include an allocated
portion of the home (the rented rooms) when calculating a "period
of nonQualifying use after 12/31/08.
That would be the question indeed.

Because otherwise, the period after we moved out is clearly not "nonqualified".

According to www.irs.gov/pub/irs-pdf/p523.pdf page 15:

"Exceptions. A period of nonqualified use does not include:
1. Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home"
"Example 2.–Assume that an individual buys a principal residence on January 1, 2009, for
$400,000, moves out on January 1, 2019, and on December 1, 2021 sells the property for
$600,000. The entire $200,000 gain is excluded from gross income, as under present law,
because periods after the last qualified use do not constitute nonqualified use."

So, I just looked at TurboTax 2011 Premier edition. TurboTax (*and* the Home Sale Worksheet form) is asking me for "Aggregate number of days of non-qualified use after 12/31/2008". It doesn't sound like the partial rental (rooms) would count into the days or even somehow pro-rated. I mean, if they wanted a portion, they'd say "portion" not "days".

If this is really "days" and not "portion" then, it seems to me that I'd get all my gains exempted from tax.
 
P

Peter

So, do people agree with my conclusion that none of this "nonqualified" stuff really applies to my case?
 
A

Alan

So, do people agree with my conclusion that none of this "nonqualified" stuff really applies to my case?
Because you used the home as your residence and only rented rooms there
would not be any disqualified period of use. All that you would have to
account for is the section 1250 gain attributable to allowable depreciation.
 
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B

Bill Brown

On 6/15/2012 10:34 AM, Peter wrote:> So, do people agree with my conclusion that none of this "nonqualified" stuff really applies to my case?

Because you used the home as your residence and only rented rooms there
would not be any disqualified period of use. All that you would have to
account for is the section 1250 gain attributable to allowable depreciation.
That would be attributable to ALLOWED depreciation. See IRC Section
1250(b)(3)--Depreciation adjustments which states, "... if the
taxpayer can establish by adequate records or other sufficient
evidence that the amount allowed as a deduction for any period was
less than the amount allowable, the amount taken into account for such
period shall be the amount allowed."
 

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