Primary residence tax exclusion when you sell

9 Replies

Hi everyone. Just wanted to clarify. If I lived in my primary residence from September 2012- December 2015. And I rent it out from January 2016- December 2017. Do I still qualify for the 250k tax exclusion if I sell it in January 2018? Does it have to be my current primary residence when I sell it to qualify for the tax exclusion?

My understanding was you just have to live in your primary residence for 2 out of the last 5 years. You can convert it to rental and as long as you sell it within the 5 year time period you're good. However a financial advisor from a law/tax firm was telling me otherwise.

Thanks in advance.

Since you have already owned and occupied the house as your primary residence for at least two years of the five years prior to your projected sale date, you are still eligible for the §121 capital gains exclusion provided you sell before the third anniversary of your moveout date (sometime in December 2018), even if you have already established another home as your primary residence.

Just to be clear, the capital gains exclusion is not $250K.  Under the §121 provisions, you can only exclude your actual capital gain up to $250K per taxpayer.  

I would not have any further dealings with the financial advisor you spoke with.

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@Dave Toelkes and @Steven Hamilton II

Do I have to change my mailing address back to that property prior to selling it? I received a follow up call from the advisor after she clarified it with their tax attorney and that is what she said.  I might have to call IRS about this to clarify, however I would like to ask here first for second opinion. I'm sure there are folks here who've done this before or are knowledgeable about this. 

Originally posted by @Oliver Martin :

@Dave Toelkes and @Steven Hamilton II

Do I have to change my mailing address back to that property prior to selling it? I received a follow up call from the advisor after she clarified it with their tax attorney and that is what she said.  I might have to call IRS about this to clarify, however I would like to ask here first for second opinion. I'm sure there are folks here who've done this before or are knowledgeable about this. 

 You better be able to document and prove that you lived there again. Utility bills, pictures etc. mail helps as well.

Why would you change your address if you are never moving back into that house?  It is tenant occupied (right?) and you want to antagonize your tenant by having your mail sent to your former home?

I am guessing that the tax adviser you are talking to (incorrectly) believes that the three year window on the capital gains exclusion will have closed before your projected sale date and (it seems to me) this is why you are apparently being told to make it appear that you have reestablished your former home as your primary residence.

The advice you are being given implies that you will also have to take your property out of service as a rental.  This may be something that you were planning to do anyway when you put your former home on the market for sale. I don't understand the need to change your address.  I don't agree that it is necessary to do so, but if there is some tax wrinkle I am not aware of or some detail you have not shared that alters the scenario you presented, I am open to a trainable moment.

@Steven Hamilton II and @Dave Toelkes

Thanks again. Yes, what she is saying doesn't make sense. Even the IRS website doesn't mention that the house should be your current primary residence at time of sale.

This is from the IRS.gov website

"Topic 701 - Sale of Your Home
If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income. You may qualify to exclude up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home, provides rules and worksheets. Topic 409 covers general capital gain and loss information.

Qualifying for the Exclusion
In general, to qualify for the exclusion, you must meet both the ownership test and the use test. You are eligible for the Section 121 exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule."

I will sell the property as previously planned and if there is any changes or new information I will report back on this thread. Thank you.