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Ask Lane Your Own Question
Category: Tax
Satisfied Customers: 9718
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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My husband and I purchased an investment home in Prescott,

Customer Question

Hi My husband and I purchased an investment home in Prescott, Arizon for $405,000 in 2012. We rented it for 2 years and moved into it as aour primary home in Aug 29, 2014. We have utility bills showing our date of establishment. We are now in the process of selling the house and we are shy of the two year of living there. We want to close on Aug 15. We have put in about $32000 in the home as capital improvements.
Please advise on the penalties I may encounter for selling the home 2 weeks earlier.
Thank you
Submitted: 3 months ago.
Category: Tax
Expert:  Robin D. replied 3 months ago.


If you do not have a reason for the early sale (less than 2 years) that would allow an exception, you cannot claim the exclusion of gain on the sale under IRC 121. The law permits a maximum gain exclusion of $250,000 ($500,000 for certain married taxpayers). That is the penalty. You pay tax on the gain.

A reduced exclusion is available (prorate amount by how long you did use the property) to anyone who does not meet these requirements because of a change in place of employment, health or certain unforeseen circumstances.

Customer: replied 3 months ago.
Expert:  Lane replied 3 months ago.



I see that you've requested a new answer.


I cannot, however, disagree. There ARE some points that need to be addressed about the fact that during your time of ownership you had periods of disqualified use ( which ALSO causes a reduction of the exclusion of gain).


If you had owned, NEVER rented, and then sold prior to using as your home for 24 months (there is also a days measurement acceptable, but two weeks won't get you there), then there would be no exclusions allowed.


(26 U.S. Code § 121 - Exclusion of gain from sale of principal residence)


If, you had owned and DID meet the two year rule for primary residence, then you would still have to modify the gain exclusion. (lower the amount of gain you could exclude by a factor of disqualified use (time rented) divided by time owned.


Expert:  Lane replied 3 months ago.

(C)Period of nonqualified useFor purposes of this paragraph—

(i)In general

The term “period of nonqualified use” means any period (other than the portion of any period precedingJanuary 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.


Gain otherwise excludable must be reduced by factor, where this disqualified use is the numerator and ownership period is the denominator

Expert:  Lane replied 3 months ago.

I hope you’ll rate me (using those stars, or faces on your screen, by clicking submit) based on thoroughness and accuracy, rather than any good news / bad news content. Otherwise I’m working for no crediting at all here.

Thank you!


I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, on three continents, since 1986.

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