2-Out-Of-5-Year Rule -- tax

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2-Out-Of-5-Year Rule -- tax

David Smith
Rental Property Investor · NJ/PA · Member since 2016 · 555 posts · 149 votes

You must have lived in the home for a minimum of two out of the last five

years immediately preceding the date of the sale. The two years don't

have to be consecutive and you don't actually have to live there on the

date of the sale.

Can i live in the house in year 1, and year 3, not year 2, to qualify?    Must i live there year 1-2, 3-4 continually?

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @David Smith:

THanKS a lot!!

How to prove to IRS you live there for 24 months?   tax return?

 Yes you'll report the occupancy via your taxes

Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y

    It's a total of 24 months out of the 60 before sale. 

    It can be any 24 months. 

    You can occupy it for 1 year, then not year 2, then occupy it year 3, and then sell. 

    As long as a collective 24 of the past 60 months you've owned and occupied

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
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  • David Smith
    OP
    Rental Property Investor · NJ/PA · Member since 2016 · 555 posts · 149 votes
    6y

    THanKS a lot!!

    How to prove to IRS you live there for 24 months?   tax return?

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y
    Originally posted by @David Smith:

    THanKS a lot!!

    How to prove to IRS you live there for 24 months?   tax return?

     Yes you'll report the occupancy via your taxes

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    1Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y

    @David Smith

    It's more complicated than that.

    For example, you can live there year 1, rent for 3 years, live there again for the 5th year. It will satisfy the 2 out of 5 years rule, but you still will not get a full exemption because of other rules.

    Run the full scenario by a knowledgeable accountant before making your decisions.

    "Prove" will only happen if you are audited. You don't have to prove anything when you file the return. They trust you, kind of.

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  • David Smith
    OP
    Rental Property Investor · NJ/PA · Member since 2016 · 555 posts · 149 votes
    6y

    I have 2 houses ...   

    year 1:  in house 1

    year 2:  in house 2

    year 3:  in house 1

    year 4:   in house 2

    It is OK to claim for both houses?      When in one house, the other one as rental

    often, what documents to keep in case you need proof?

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y

    @David Smith

    You cannot have an exemption for two houses unless the sales are 2 years apart, and neither one qualifies for a full exemption anyway, based on your situation.

    I'll repeat myself: run your plan by a good accountant. This is not a 2 minute issue.

    1Reply
  • David Smith
    OP
    Rental Property Investor · NJ/PA · Member since 2016 · 555 posts · 149 votes
    6y

    the home address on tax return(filed in april 2019) is the home address for tax year 2018, right?

    If i live in house 1 in 2018, and live in house 2 in 2019 --- when i file tax in april 2019 for tax year 2018, shall I use address of house 1 or 2?    Shall be house 1, right?  Since i lived in house 1 in 2018 and i am filing for 2019 although I live in house 2 now. 

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  • Bob NortonPro Member
    Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
    6y

    @David Smith When you file your tax return, you list the address where you receive your mail.

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  • Michael DohertyBusiness Member
    Real Estate Agent · West Hartford, CT · Member since 2016 · 449 posts · 476 votes
    5y

    @Natalie Kolodij thank you for your input here. Is it true you are only exempt on the unit you live in 2/5 years if its a multi? Meaning, if you house hack a duplex for 2/5 years and then sell, you will still have to pay taxes on half the sale. Or if its a triplex, 1/3 of the sale capital gains will be exempt. 

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