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This question concerns the Capital Gains exemption on the

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sale of a home. We own...
This question concerns the Capital Gains exemption on the sale of a home.
We own 2 homes. One in NH that we have owned and used for 33 years. That was our summer home for 5+ months each year during 2004-2014. The one in NC, we bought in April 2015. Prior to that we owned a home in FL, which was our primary residence for 11 years. We sold that at a loss in April 2015
In May 2015, we "registered" the NH home with our local town home as our primary residence and changed our voter registration and drivers licenses at the same time. Our tax returns since the 2014 tax year list the NH home as our primary residence. By May 2017, we will have spent 13 months the NH Home. During that period we will have spent 11 months in our NC winter home.
We plan to sell out NH summer home some time after May 2017. We have received conflicting advice concerning capital gains tax treatment on this sale from two different sources.
One, a "Real Estate Lawyer" that we consulted, told us that by May 2017, we would qualify for the $500,000 capital gain exemption at that point.
The other a CPA advised that we would need to occupy our primary residence for 24+ months, LOOKING BACK from the date of the sale. He provided information and examples for this that suggested that by May 2017 we would have occupied the NH home for 12+ months over two years, and by "Looking Back" 3+ years from that point, we would have occupied the NH home for an additional 16+ months for a total of 28 months. Can you confirm this?
It is not clear to us whether the look-back period starts on May 2015 or in May 2017.
Submitted: 1 year ago.Category: Tax
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7/25/2016
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 1 year ago
Mark Taylor
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Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 1 year ago

The IRS changed the rules for the exclusion for taxpayers that owned multiple home. The rule change in 2009. The prior rule was that as long as you met the 2 out of 5 years as your primary residence then you could exclude, if married, a gain of up to $500,000. After 2009, the IRS considers the time that you owned the property (that you did not considered it your principal residence) as non qualified use. So in your example the time from January 2009 to April 2015 would be non qualified use. To keep things simple lets call this 6 years. Let's say that you decide to sell the property in May of 2017 (meeting the 2 year rule). Your exclusion would be limited by the 6 years of non qualified use of the property. So the exclusion is the ratio of qualified as a percentage of time you owned the property. Only the time period after 1/1/2009 is considered for non-qualified use. So you would be eligible to exclude 25% of the gain.

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Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 1 year ago

The code section for the exclusion from the sale of your principle residence is IRC 121.

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Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 1 year ago

Here is the code from IRC 121(b)(5) that applies to your situation.

(5) Exclusion of gain allocated to nonqualified use

(A) In general

Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use.

(B) Gain allocated to periods of nonqualified use For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—(i)

the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to

(ii)

the period such property was owned by the taxpayer.

(C) Period of nonqualified use For purposes of this paragraph—(i) In general

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

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Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 1 year ago

Here is an article that discusses the impact of the new rules to taxpayers with multiple homes. http://www.bankrate.com/finance/debt/new-tax-rules-could-cost-second-homeowners-1.aspx

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Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 1 year ago

I hope you found this information to be beneficial. If this answered your question please take a few moments to rate my response. A rating is needed in order for me to receive credit for helping you today. The rating bar is located at the top of the page – ranging from 1 to 5 stars. If you need me to clarify aspect of my response or if there are additional areas of the question that you would like me to consider please let me know. I would be happy to continue the discussion. It has been my pleasure helping you today.

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Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 1 year ago

Please let me know if you have any questions or need clarification. I am happy to help.

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