We purchased a home last year that we were planning to rehab completely and then move into. The rehab happened, but the move in did not because my wife was transferred to another city. We've been in a rental throughout the rehab and are about to sell the house. Because we purchased the house under a primary residence loan, and our intent was to move in, we're wondering if we can make the argument that it was our primary residence and claim any gain tax-free. (The IRS allows for a pro-rated exclusion on any gains if you can show that you have to move to another city because of a job change.) Think this might fly? Or is there no way to get around the rule that you have to have actually resided at the property? Take it easy on me if you think this is crazy!
You are asking about capital gains? You have to live in the house for 2 of the past 5 years for it to be considered a primary residence for tax purposes. Even if you actually lived there, it wouldn't count as a primary residence because you don't meet the time requirement.
PS: I'm not a tax accountant or lawyer, please consult your CPA and/or tax lawyer.
@Patrick M. Nope. You have to own and use the property as your primary residence. If you never moved into it, you never used it.
Thanks, Brandon. I figured as much but thought I'd check.
Luka, there's an exception to the two-year rule if you're forced to move further than 50 miles because of a job change.
How does the IRS know where you sleep. Legally a primary residence is the place where you intend to return when away. It has as much to do with intent as it does to do with furniture. For example a soldier may be in Baghdad, yet maintain a primary residence in Boston.
@Jonathan David The IRS provides military members with plenty of safe havens. If @Patrick M. is a member of the military, we may have a different outcome. But that's completely different from the average citizen trying to pull this off.
The IRS can't tell where you sleep, until of course they audit you and turn your life upside down because you claimed an exemption on profits from a flip that you "intended" to live it.
While a primary residence may "legally" be the place where you intend to return, that's not how the IRS defines it. Ownership and use. Use being that you actually live in the property.
Many people think "bah, I'll never get caught" and it's a great thought process and saves you a lot of money until the day you get caught. Something like this could arguably fall under the fraud (due to negligence) category, providing the IRS with an unlimited statue of limitations. It would be painful to have to revisit this in 15 years and try to argue your case.