Home Sale

[Christian]

A client who moved here in early 2013 from North Carolina recently sold his former home in North Carolina in July (15) of last year. In determining whether he gets the $250,000 exclusion he is eligible for do you count back in months five years to July 15, 2011 ? This is going to be problematic as he will have filed four years 2013 - 2016 as a Virginia resident and paid Virginia taxes for those four years. I surely don't want him to receive an audit from this. 

[Jack from Ohio]

No exclusion.  It became a second home (vacation home) when he made the house in VA his primary residence.

[Gail in Virginia]

I think the way it is worded is that it has to have been his principal residence for two of the last five years.  If he filed a resident Virginia return for 2013, 2014, 2015, and 2016 it would have only been his primary residence for one of the last five years.  I think.  If he filed part-year for 2013, then maybe but i am still doubtful.  I don't think that 1 1/2 is the same as two. 

[jklcpa]

Yes, the five year look back starts on 7/15/16 so you are correct that in this case would go back to 7/15/11.  You may count the number of days of personal use from 7/15/11 coming forward to when he moved into the new home and divide that by 1825 to arrive at the percentage of the $250K he is allowed, or you may use whole months divided by 60 months.  He would need 730 days or 24 months during the look back period in order to utilize the full exclusion, and he must not have excluded any gain from another residence during that period.

 

[Terry D EA]

All of the responses you have received are correct. The rule is he must have lived two out of the last five years he owned the home. They do not have to be consecutive.

[Christian]

Alas ! He downloaded the IRS publication on home sales and has concocted in his mind a justification for using the full exclusion. I rather doubt the Service checks these all that closely. Still they will be looking at four years of tax returns from Virginia. I told him if he receives a letter down the road he may have to sit down and chat with them. What Terry said is my concern since he has lived in Virginia four how the devil could he have lived in Carolina two out of five. Time will tell.

[Terry D EA]

15 minutes ago, Christian said:

Alas ! He downloaded the IRS publication on home sales and has concocted in his mind a justification for using the full exclusion. I rather doubt the Service checks these all that closely. Still they will be looking at four years of tax returns from Virginia. I told him if he receives a letter down the road he may have to sit down and chat with them. What Terry said is my concern since he has lived in Virginia four how the devil could he have lived in Carolina two out of five. Time will tell.

That would be a good trick and it would be interesting to see how he would pull it off. I hope you are not preparing his return the way HE wants you to. I would insist on preparing the return by the tax code and not the client's convoluted understanding. Be careful, and check the circular 231 code of ethics. You know what is right and wrong here. As I see it, only one way to prepare the return. He doesn't qualify for the exclusion and that is that.

I wouldn't concern myself with whether the service closely checks this or not. I just would not be part of the gamble. Just my 2.5 cents worth.

Edited April 8, 2017 by Terry D
To additional comment

[Jack from Ohio]

1 hour ago, Jack from Ohio said:

No exclusion.  It became a second home (vacation home) when he made the house in VA his primary residence.

 

[Pacun]

1 hour ago, jklcpa said:

Yes, the five year look back starts on 7/15/16 so you are correct that in this case would go back to 7/15/11.  You may count the number of days of personal use from 7/15/11 coming forward to when he moved into the new home and divide that by 1825 to arrive at the percentage of the $250K he is allowed, or you may use whole months divided by 60 months.  He would need 730 days or 24 months during the look back period in order to utilize the full exclusion, and he must not have excluded any gain from another residence during that period.

 

This is correct.

Jack, as long as the house was your primary home for 2 years (or less in this case), out of 5 years, you can get a portion of the exclusion. The rule is lived and owned it.

 

[jklcpa]

This person might also qualify for the reduced exclusion if his move to VA was work-related or can qualify for one of the other exceptions that would allow proration of the exclusion.

[Jack from Ohio]

19 minutes ago, Pacun said:

This is correct.

Jack, as long as the house was your primary home for 2 years (or less in this case), out of 5 years, you can get a portion of the exclusion. The rule is lived and owned it.

 

The IRS rarely checks these things, but I would be interested if this concept has been cleared through an audit?  I would NOT take the position.

[jklcpa]

2 hours ago, Jack from Ohio said:

No exclusion.  It became a second home (vacation home) when he made the house in VA his primary residence.

Jack, please see code below and also the  exception to qualified non-use factor:

IRC 121 (a) Exclusion - Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.

(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.

But, then there is this:

(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.

(ii) Exceptions    The term “period of nonqualified use” does not include—

(I)  any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,

(II)  any period (not to exceed an aggregate period of 10 years) during which the taxpayer or the taxpayer’s spouse is serving on qualified official extended duty (as defined in subsection (d)(9)(C)) described in clause (i), (ii), or (iii) of subsection (d)(9)(A), and

(III)  any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the Secretary.

[Terry D EA]

Judy, I agree with you if those conditions of non-qualified use apply. The original post didn't give any reasons why the taxpayer moved. I think Jack I both assumed he just relocated which if he did, then no exclusion. Hopefully Christian will give us more information. I still stand against preparing the return the way the client wants. I know Christian didn't say that specifically but it seemed like a possibility from his reply. Hence, my comments.

[Pacun]

Let's say that you buy a house and move in on April 15, 2010 and you live there as your primary home until April 15, 2012. Then you move out because you like Florida and you want that better weather, and on April 15th, 2015, you sell at a gain, you will be able to exclude the gain up to 250K for single. Let's say that you made 500K profit on that house, you will be able to exclude ONLY 200K.

Same facts as before, except that you sold the house on April 15, 2016, so you will have a prorated exclusion. The exclusion will be something like this 500K\6\2.

 

[Lion EA]

Can you prorate the exclusion just because you wanted to move?  Or, do you have to meet one of the unforeseen circumstances to prorate?

[ILLMAS]

Just this week I had a client that sold their personal home that became a rental for the past years, in my head they qualified for the exclusion, but when I put the months on paper they missed the exclusion by 4 months.  It's very simple to do.

[Christian]

I did a backdate for him. He moved to Virginia in September 2013. The house was sold in June 2016. It does indeed appear he can take the exclusion. I would not be surprised if they question it but June 2011 to September 2013 is clearly two years.

[jklcpa]

I think where some of these people with questionable exclusions get it by the IRS is when the settlement agent asks about the move and usage dates. Isn't there some form or question that is asked of the seller whether or not they qualify for the gain exclusion, and if they say 'yes', then the 1099-S is not issued?

[RitaB]

2 hours ago, jklcpa said:

I think where some of these people with questionable exclusions get it by the IRS is when the settlement agent asks about the move and usage dates. Isn't there some form or question that is asked of the seller whether or not they qualify for the gain exclusion, and if they say 'yes', then the 1099-S is not issued?

Yep. 

[Jack from Ohio]

22 hours ago, Christian said:

I did a backdate for him. He moved to Virginia in September 2013. The house was sold in June 2016. It does indeed appear he can take the exclusion. I would not be surprised if they question it but June 2011 to September 2013 is clearly two years.

Gather your documentation for response to the letter.  I would NOT have calculated any exclusion based on the information as provided in this post.

Good Luck.