Recently, I started thinking about when I should consider selling my home.
The real estate market has been red hot the last few years. I should know, because I build software products for home buyers and sellers at Redfin!
I began to wonder whether it’s a good time to cash in on sky-high housing prices.
As I contemplated this, I poked around the tax rules to understand how capital gains are taxed when you sell your house.
Turns out if you do it right, the IRS will give you a nice little tax-free break when you sell your house.
You can completely exclude from taxes up to $250,000 in gain if you’re single; $500,000 if you’re married filing jointly.
As I researched this little tax benefit more, I discovered a LOT of nuance to how it works…. My head was spinning!
In fact, I needed to write it down and go through several examples to really grasp it.
So today, I’m gonna share in excruciating detail exactly how this tax break works. It has tricky nuances you have to know to make sure you don’t accidentally disqualify yourself.
All homeowners out there thinking of selling their house — and even home buyers who just want to learn how to be tax-efficient — can get a LOT of value from understanding the intricacies of how this part of the tax code works.
I’m gonna structure this post as an FAQ. But I’ll use a bunch of examples to actually show you how the nuances, exceptions, and limitations work.
Click any of the links below to jump to each question.
First, what part of the tax code are we talking about?
Who qualifies for the exclusion?
What type of home qualifies for the exclusion?
How much can you exclude from taxes?
When can you claim this exclusion?
What does the exclusion mean for tax purposes?
Did you know you’re throttled on how many times you can claim this exclusion?
What other special rules apply to married taxpayers?
But sometimes, married couples are treated as if they had not been married…
Changes to the law in 2009
You can’t claim an exclusion for “periods of nonqualified use”
What is “nonqualified use”?
But there are some exceptions…
So…what happens when you have “periods of nonqualified use”?
Example #1: The simple case…
Example #2: The unhappy simple case…
Example #3: Let’s add some spice…
Example #4: Straddling the border
What happens when you fail to meet some requirements of the law?
Examples of change in employment
Examples of change in health
Examples of other unforeseen circumstances
Great, you’re eligible for a partial exclusion! Now how is it actually calculated?
Two final notes about job changes, health, and other unforeseen circumstances
A word about depreciation recapture
Let’s start with the basics….
First, what part of the tax code are we talking about?
The statute that governs the $250k / $500k exclusion on home sale gains is:
26 U.S. Code § 121 – Exclusion of gain from sale of principal residence
This is from the Internal Revenue Code. I won’t copy the actual text of the statute here, ‘cause frankly it makes my eyeballs hurt. But feel free to click and read and compare my explanations to the statute if you’re unclear about anything (or just want to check my work).
Who qualifies for the exclusion?
People who own and use a home as a primary residence for at least 2 of the 5 years before selling their home.
What type of home qualifies for the exclusion?
Basically, any home that is your primary residence. Doesn’t matter if it’s a single family home, condo, townhouse, whatever.
What determines whether a home is your primary residence is whether you are physically living in the home.
How much can you exclude from taxes?
Up to a maximum of $250k gain if you’re single, $500k if you’re married filing jointly.
If you sell your home for LESS gain than these amounts, the amount you can exclude will obviously be less. It’s limited to your actual gain.
When can you claim this exclusion?
Upon the sale, exchange, or involuntary conversion of your primary residence. We’ll talk more later about what “exchange” and “involuntary conversion” mean.
What does the exclusion mean for tax purposes?
It means the capital gain from the sale of your home, up to $250k for single filers and $500k for married joint filers, is excluded from your income FOREVER.
You also won’t need to make any basis adjustments to any replacement home you buy.
Did you know you’re throttled on how many times you can claim this exclusion?
Yup. You can only claim this exclusion once every TWO years.
So, no luck trying to buy and flip houses and claim this exclusion every year.
What other special rules apply to married taxpayers?
In order to get double the exclusion amount, i.e., $500k:
- At least ONE spouse must own the home for 2 of the 5 years prior to sale
- BOTH spouses must actually live in the home as their primary residence for 2 of the 5 years prior to sale
- NEITHER spouse can be in a “time out” because of the every-2-years throttle limit mentioned above
If you and your spouse satisfy all these criteria, hooray — you get a $500k exclusion!
But sometimes, married couples are treated as if they had not been married…
But what happens when you or your spouse fail one of the criteria above?
Well, you don’t get knocked out entirely.
What happens is, the IRS grants you an exclusion AS IF you had not been married.
What that means is, the IRS will evaluate each of you independently to see what your own personal exclusion WOULD have been had you been a single tax filer.
Furthermore, for purposes of that analysis, the IRS will treat BOTH spouses as having owned the property whenever EITHER owned the property.
In other words, if only ONE spouse actually held title, the IRS will fictionally assume BOTH spouses held title at the same time…but just for this one analysis.
However much exclusion each of you would be entitled to via this analysis, the IRS will take the sum of both amounts and declare that as the total exclusion you are jointly entitled to.
This may sound complicated, but you can get a feel for its application by considering the case where, say, a woman owns and lives in a home for 3 years before marriage, then marries, and then 1 month after her wedding decides to sell her house because the couple moves to a new city for new jobs.
In that case, the husband will fail the 2-year residency requirement, so the IRS will evaluate them separately, but will fictionally assume the husband owned the house for the same time the wife owned the house — 3 years.
Then the IRS will take whatever partial exclusion the husband is entitled to, add it to whatever exclusion the wife is entitled to, and then declare the SUM to be the actual exclusion the couple is jointly entitled to.
We’ll see some detailed examples of this later.
Changes to the law in 2009
In the simple days before 2009, the rules were uncomplicated.
As long as you satisfied the 2-year residency requirement, you could claim a nice fat exclusion.
But starting in 2009, Congress decided it needed to raise more tax revenue. So it amended the rules on primary residence capital gains tax exclusion to make it more restrictive.
Now, you have to meet the 2-year residency requirement PLUS check a few other boxes to get the full exclusion.
A lot of people will get caught by these changes, so let’s examine what they are….
You can’t claim an exclusion for “periods of nonqualified use”
Basically, the IRS now says, assuming you first meet the 2-year residency requirement, you will only be allowed to claim the tax exclusion for “periods of qualified use.”
You can no longer get it for “periods of nonqualified use” even when you meet the residency requirement.
What’s considered qualified vs. nonqualified use?
What is “nonqualified use”?
First, the IRS says the term “period of nonqualified use” means any period starting January 1, 2009, when the home is not used as a primary residence of the taxpayer or taxpayer’s spouse.
So, anything before 2009 still counts under the old law. The new restrictions only apply starting January 1, 2009.
That means if you bought your home before 2009 and sold it during or after 2009, then you’ll use the old law to determine your tax liability for the part before 2009, and then use the amended law to determine your tax liability for the period afterward.
I hope that doesn’t make your head want to explode.
Since the test for primary residence is whether you are physically living in the home, then any time you are NOT physically living in the home, the home is NOT considered your primary residence.
If you rent your home out, it’s not your primary residence. (However, if you just rent out 1 room, you’re still safe, but fractional depreciation rules will apply to that room.)
If you live somewhere else for part of the year, like a vacation home, then your regular home is not your primary residence while you’re away.
I don’t think the IRS will check too carefully if you are just going on vacation for 2 weeks and living in hotels, even though I think that technically means your home is not your primary residence while you’re away.
But there are some exceptions…
Even though the new rules around “nonqualified use” mean the $250k / $500k tax exclusion is no longer simply determined by the 2-year residency requirement, there are a few exceptions where not living in the home is nevertheless recognized by the IRS as permissible for tax exclusion purposes.
There are 2 exceptions I want to point out in particular.
First, the period between the LAST date the home is used as a primary residence and the date the home is sold is NOT considered nonqualified use.
To be clear, it’s not considered qualified use, either; it’s just not NONqualified use. Our examples later will show the significance of this distinction.
Second, any temporary absence, not exceeding 2 years, due to a change of employment, health condition, or other unforeseen circumstances also is not considered nonqualified use.
We’ll have to define these terms: “employment,” “health condition,” and “other unforeseen circumstances” and we’ll talk more about them in a moment.
So…what happens when you have “periods of nonqualified use”?
If part of your ownership period consists of nonqualified use, you won’t get the full tax exclusion, even if you satisfy the 2-year residency requirement.
But you might still be eligible to claim a partial tax exclusion.
And remember: all this stuff about nonqualified use only applies to 2009 or later. Before that, there is no such concept and therefore no restrictions on the tax exclusion.
We’ll show how this works in our examples below.
So…if you can only claim part of the tax exclusion, exactly how much CAN you claim?
It’ll be a percentage. The way the IRS determines that percentage is by creating a fraction.
The numerator of the fraction is the total days of nonqualified use while you owned the home SINCE January 1, 2009.
The denominator is the total days you owned the home, even before 2009.
That percentage is what you CANNOT exclude from taxes. You can exclude the rest.
Okay, enough theory.
It’s time we look at examples to see how this all works….
Example #1: The simple case…
Let’s say Victor and Victoria, a married couple, purchase a home for $1 million and sell it for $1.6 million.
Victor and Victoria buy their home January 1, 2010. They live there as their primary residence for 2 years plus 1 day, moving out January 1, 2012.
The next day, they rent out the house to a tenant, who leases it for 2 years plus 364 days — just shy of 3 years. They sell the house December 31, 2014, exactly 5 years after buying it.
What are the tax consequences?
Since their entire ownership period occurs after 2009, only the post-2009 regime applies.
In this case, Victor and Victoria will get the full tax exclusion of $500k.
They satisfied the 2-year residency requirement because they lived in the house for 2 years and a day.
They also have a valid exception to nonqualified use because the period after the LAST date the home was used as a primary residence (January 1, 2012) is NOT considered nonqualified use.
That’s true even though they rented out the home for nearly 3 years.
So, Victor and Victoria get the first $500k gain excluded from taxes. They’ll pay long-term capital gains taxes on the final $100k of gain.
Example #2: The unhappy simple case…
Let’s look at a similar example:
Same facts as above, except here Victor and Victoria move out 1 year plus 364 days after buying and occupying the house — just shy of 2 years.
They rent out the house for the remainder of the time until they sell at the 5-year mark.
Now, our unhappy couple fails to satisfy the 2-year residency requirement.
Even though the period after they move out is still validly excepted from nonqualified use, they cannot claim any tax exclusion because they failed the 2-year residency requirement.
So they must pay long-term capital gains taxes on the entire gain of $600k. Bummer.
Example #3: Let’s add some spice…
Getting a little more complicated, let’s say Victor and Victoria buy their home for $1 million on January 1, 2010.
They live there 1 year and move out December 31, 2010, so Victoria can accept a 1-year job rotation to a foreign branch office of her company. During their year abroad, they rent out their house.
The day after the tenant’s lease ends on December 31, 2011, they move back in. They live there for 2 more years and then move out again December 31, 2013, because they “just want to change things up.”
They find a new tenant and start renting the house out the following day until they sell exactly 2 years later on December 31, 2015, for $1.6 million.
In this scenario, Victor and Victoria own the house for a total of 6 years.
4 discrete use periods:
- Primary residency #1 (1 year from 1/1/10 – 12/31/10)
- Move out for job rotation (1 year from 1/1/11 – 12/31/11)
- Primary residency #2 (2 years from 1/1/12 – 12/31/13)
- Move out to change things up (2 years from 1/1/14 – 12/31/15)
What are the tax consequences?
Victor and Victoria still get the full tax exclusion of $500k.
First, the IRS looks back 5 years from the sale to evaluate the 2-year residency requirement. In this case, it was satisfied.
Next, we determine that the earliest year of the lookback period, 2011, does not count as “nonqualified use,” even though Victor and Victoria weren’t living in the house, because they moved due to a job rotation which is a valid exception.
Finally, the last 2 rental years also don’t count as “nonqualified use” because of the exception after the LAST date the home is used as a primary residence. So, 2014 and 2015 will not count as “nonqualified use.”
That means, even though half the 6-year period was spent renting the house to tenants, Victor and Victoria can still claim the full exclusion because there are no periods of nonqualified use!
Victor and Victoria happily exclude the first $500k gain and then pay regular capital gains taxes on the last $100k.
Example #4: Straddling the border
What about when the house is purchased before 2009 and sold after 2009?
Same facts: Victor and Victoria buy for $1 million and sell for $1.6 million. Except this time, the ownership timeline looks like this:
They buy and move in January 1, 2006. They move out 1 year later and rent out the home for the next 4 years: 2007, 2008, 2009, and 2010.
They move back in 2011 and live there exactly 1 year before accepting a job rotation overseas. For that year abroad (2012), they rent out the house.
When they return, they move back in New Year’s Day 2013 and live there for 3 years before selling at the end of 2015.
What are the tax consequences?
They’ll be able to claim 80% of the $500k tax exclusion, but they’ll have to pay regular capital gains taxes on the other 20%, plus on the last $100k of gain.
First, we analyze whether they meet the residency requirement: they do. They lived in the home for 4 years: 2011, 2013, 2014, and 2015.
Next, we know their job rotation year (2012) is a valid exception to “nonqualified use” even though they rented the house out.
Since they owned the home before 2009, we ignore all rental years before then, because there is no such concept as nonqualified use before 2009.
We only analyze rental years starting 2009 — in this case 2009 and 2010.
We take the ratio of nonqualified use to the full ownership duration to compute how much gain CANNOT be excluded from taxes.
Here, the numerator is 2 years for the rental period of 2009 and 2010. (Remember, the job rotation year 2012 is a valid exception.)
The denominator is 10 years, the entire period of ownership from 2006 – 2015.
So, that tells us we cannot claim the tax exclusion on 20% of the gain, which means we can claim it on the other 80%.
Victor and Victoria can claim $400k in gain tax-free — that’s 80% of $500k. They’ll pay regular capital gains taxes on $100k, or 20%, and they’ll pay capital gains taxes on the last $100k of gain (they bought at $1 million and sold at $1.6 million).
Nice!
What happens when you fail to meet some requirements of the law?
We’ve seen that satisfying the requirements lets you exclude up to $250k / $500k from taxes.
And when you have some nonqualified use, you can still exclude some gain, as long as you meet the other requirements.
But if you fail the other requirements, you generally cannot exclude any gain from taxes.
But there is an important exception: If you sell your home but don’t meet the residency requirement, or you sell within 2 years of selling another home, you MAY still be eligible for a partial exclusion IF the sale is due to a change in employment, health, or “other unforeseen circumstances.”
But what qualifies as a “change in employment, health, or other unforeseen circumstances”?
The IRS has helpfully published regulations providing guidance and examples describing these scenarios. (For the details, see: “IRS Treasury Regulations Section 1.121–3.”)
Let’s take a quick look…
Examples of change in employment
The IRS says a home sale counts as “due to a change in employment” if the main reason for the sale is because your employment LOCATION changed.
The regulations use something called a “safe harbor.”
A safe harbor is a simple test you use to analyze your situation and “passing” the test means the IRS automatically grants you a partial tax exclusion.
Failing the test does not mean you lose the partial exclusion. It just means the IRS doesn’t automatically grant it to you.
Maybe they’ll need more info before deciding. Or maybe they won’t and they’ll grant it to you anyway. Passing the safe harbor just “fast tracks” their analysis. But failing it doesn’t preclude you from a partial exclusion.
For job changes, the safe harbor is 50 miles.
That is, your home sale is automatically deemed to be caused by a job change if your new job location is at least 50 miles farther from your house than your old job. If you didn’t have an old job, then it’s if your new job location is at least 50 miles away from your house.
Important: That job change must occur during the time you own AND use your home as your primary residence.
It doesn’t matter if you start a brand new job, continue an old job, or are self-employed. The only thing that matters is location, the change in your commute distance.
Let’s see how it works.
Example 1: Alex is unemployed and owns a townhouse that she has owned and used as her principal residence since 2015. In 2016, before satisfying the 2-year residency requirement, Alex obtains a job that is 54 miles from her townhouse, and she sells the townhouse. Because the distance between Alex’s new place of employment and the townhouse is at least 50 miles, the sale is within the safe harbor and Alex can claim a partial exclusion.
Example 2: Bill is an Air Force officer stationed in Florida. Bill purchases a house in Florida in 2015. In May 2016, before satisfying the residency requirement, Bill moves out to take a 3-year assignment in Germany. Bill sells his house in January 2017. Because Bill’s new job in Germany is at least 50 miles farther from his house than his old Florida job was, the sale is within the safe harbor and Bill can claim a partial exclusion.
Example 3: Crystal works in her firm’s Philadelphia office. Crystal purchases a house in February 2015 that is 35 miles away from her office. In May 2016, before satisfying the residency requirement, Crystal begins an assignment in her company’s Wilmington office 72 miles away from her house, so she moves out of the house. In June 2018, Crystal is assigned to work in her firm’s London office. She sells her house in August 2018 as a result of the London assignment. The sale is not within the safe harbor because her job change from Philly to Wilmington did not increase her commute distance by 50 miles (72 – 35 = 37). It’s also not protected by the safe harbor because of the London assignment because Crystal was not living in her house as her primary residence when she moved to London. However, Crystal is STILL entitled to a partial exclusion because, under her facts and circumstances, the main reason she sold her home WAS her change in job location.
Example 4: In July 2015 Donna, who works as an emergency medicine physician, buys a condo 5 miles from her hospital and lives in it as her primary residence. In February 2016, Donna gets a job at a new hospital that is 51 miles away from her condo. Donna may be called in to work unscheduled hours and, when called, must be able to arrive at work quickly. Because of the demands of her new job, Donna sells her condo and buys a townhouse 4 miles away from her new hospital. Because Donna’s new job is only 46 miles farther from her condo than her old job, the sale is protected by the safe harbor. However, Donna can still claim a partial exclusion because, under her facts and circumstances, the main reason she sold her condo was her job change.
As you can see, the safe harbor guarantees the partial exclusion, but its absence does not preclude the exclusion. It just means you have to look at the facts and circumstances.
Examples of change in health
What about changes in health?
Basically, you get a partial tax exclusion even when you don’t satisfy the residency requirement if the main reason you sold your home was to get medical care for an actual illness or injury that you or a family member have.
Actually, it’s whenever ANY “qualified individual” has an illness or injury, but if you read the rules that usually just means you and your family. (See Treasury Regulations Section 1.121–3(f) for the full run-down.)
Remember, it has to be an ACTUAL illness or injury. If it’s simply beneficial for your family’s health and well-being, you can’t claim the tax exclusion.
Just like with job changes, the health exception also has a “safe harbor” test.
It’s a physician’s recommendation.
That is, a home sale is automatically deemed to be caused by a health condition if a licensed physician recommends that you move to get medical care. You should get your doctor’s recommendation in WRITING to avoid any surprises.
Let’s look at some examples.
Example 1: In 2015, April buys a house and uses it as her primary residence. Then April is injured in an accident and unable to care for herself. April sells her house in 2016 and moves in with her daughter so that her daughter can care for her due to her injury. Under the facts and circumstances, the main reason for selling April’s home is her health, so April is entitled to claim a partial exclusion.
Example 2: Hank’s father has a chronic disease. In 2015, Hank and Wendy purchase a house together and use it as their primary residence. In 2016 they sell the house to move in with Hank’s father so they can care for him as a result of his disease. Since the primary reason for selling their home is for the health of Hank’s father, they are entitled to claim a partial tax exclusion.
Example 3: John and Linda purchase a house in 2015 and use it as their primary residence. Their son suffers from a chronic illness requiring regular medical care. Later that year their son begins a new treatment that is available at a hospital 100 miles away from home. In 2016, John and Linda sell their house in order to be closer to the hospital treating their son. Since the main reason for the sale is to treat their son’s illness, they are entitled to claim a partial tax exclusion.
Example 4: Ben, who has chronic asthma, purchases a house in Minnesota in 2015 that he uses as his primary residence. Ben’s doctor tells Ben that moving to a warm, dry climate would mitigate his asthma symptoms. In 2016, Ben sells his house and moves to Arizona to relieve his asthma symptoms. The sale is protected by the safe harbor so Ben is entitled to a partial tax exclusion.
Example 5: In 2015 Jill and Robert purchase a house in Michigan which they use as their primary residence. Robert’s doctor tells Robert he should get more outdoor exercise, but Robert is not suffering from any disease that can be treated or mitigated by outdoor exercise. In 2016 Jill and Robert sell their house and move to Florida so that Robert can increase his general level of exercise by playing golf year-round. Because the home sale is merely beneficial to Robert’s health, it is not a valid exception and Jill and Robert cannot claim a partial tax exclusion.
Examples of other unforeseen circumstances
All right, what’s the deal with “other unforeseen circumstances”?
Unforeseen circumstances are situations where your house is sold or exchanged due to something not reasonably anticipated and not in your control.
If the main reason for selling your house is simply due to “buyer’s remorse” or due to an unexpected improvement in your financial situation, it won’t qualify for a partial exclusion.
Just as with job changes and health conditions, “other unforeseen circumstances” also has a “safe harbor” test.
The safe harbor kicks in if ANY of the following happens while you own and live in your home:
- Involuntary conversion
- Natural or man-made disaster, war, or terrorism causing damage or destruction to your home
- Death of you or a family member
- Job loss making you or a family member eligible for unemployment benefits
- Change in employment status (e.g., reduced hours or pay) that makes you unable to pay housing costs and basic expenses (e.g., food, clothes, medical, taxes, transportation)
- Divorce or legal separation
- Multiple births resulting from the same pregnancy
The IRS may define other events as “unforeseen circumstances” as well, but they’ll do that case by case, and when that happens they’ll publish written announcements explaining whether those events are generally applicable to everyone.
Let’s walk through some examples.
Example 1: In 2015 Alice buys a house in California and moves in. Shortly afterward, an earthquake causes damage to her house. Alice sells the house in 2016. The sale is protected by the safe harbor and Alice can claim a partial tax exclusion.
Example 2: Henry works as a teacher and Whitney works as a pilot. In 2015 they buy a house to live in as their primary residence. Later that year Whitney is furloughed from her job for 6 months. The couple is unable to pay their mortgage and basic living expenses while Whitney is furloughed. They sell their house in 2016. The sale is within the safe harbor and they can claim a partial exclusion.
Example 3: In 2015, Howard and Winnie buy a 2-bed condo to use as their primary residence. In 2016 Winnie gives birth to twins and the couple sells their condo to buy a 4-bed house. The sale is protected by the safe harbor and Howard and Winnie may claim a partial tax exclusion.
Example 4: In 2015 Bruce buys a high-rise condo unit and uses it as his primary residence. His monthly condo fee is $400. But 3 months after moving in, Bruce’s condo association replaces the building’s roof and heating system. Six months later, Bruce’s condo fee doubles as a result of the repairs. Bruce sells the condo in 2016 because he can’t afford both the new condo fee and his monthly mortgage. The safe harbor does NOT apply, even though Bruce can no longer afford his housing costs. However, under the facts and circumstances, the main reason for his sale, i.e., doubling the condo fee, is an unforeseen circumstance because Bruce could not reasonably have anticipated the fee would double when he bought the unit. Consequently, the sale is due to unforeseen circumstances and Bruce may claim a partial exclusion.
Example 5: In 2015 Chris buys a house as his primary residence. The house is located on a heavily traveled road. Chris sells the house in 2016 because he is bothered by the traffic noise. The safe harbor does not apply. Because the main reason for the sale is traffic noise it is not an unforeseen circumstance and Chris cannot claim a partial exclusion.
Example 6: In 2015 Diana and her fiance Eliot buy a house to live in as their primary residence. In 2016 they cancel their wedding plans and Eliot moves out. Diana cannot afford the monthly mortgage by herself, so they sell the house in 2016. The safe harbor does not apply. However, under the facts and circumstances, the main reason for the sale, the broken engagement, is an unforeseen circumstance because Diana and Eliot could not reasonably have anticipated it when they bought the house. Therefore, they are each entitled to a partial tax exclusion.
Example 7: In 2015 Frances buys a small condo as her primary residence. In 2016 she gets a promotion and a large salary increase. She sells her condo and buys a house because now she can afford it. The safe harbor does not apply. The main reason for the sale, the salary increase, is an improvement in Frances’s financial circumstances. An financial improvement, even if due to unforeseen circumstances, does not qualify for partial tax exclusion.
Example 8: In April 2015 George buys a house to use as his primary residence. He sells the house in October 2016 because it has greatly appreciated in value, mortgage rates have declined, and he can now afford a bigger house. The safe harbor does not apply. The main reasons for the sale, the change in house value and mortgage rates, are a financial improvement, so George does not qualify for a partial exclusion due to unforeseen circumstances.
Example 9: Hudson works as a police officer. In 2015 he buys a condo to use as his primary residence. In 2016 he is assigned to the city’s K–9 unit and is required to care for his police service dog at his home. Because Hudson’s condo association does not permit dog ownership, Hudson sells the condo in 2016 and buys a house. The safe harbor does not apply. However, under the facts and circumstances, the reason for the sale, Hudson’s assignment to the K–9 unit, is an unforeseen circumstance because Hudson could not reasonably have anticipated this at the time he purchased the condo. Consequently, Hudson may claim a partial exclusion.
Example 10: In 2015, Jennifer buys a small house to use as her primary residence. Jennifer wins the lottery in 2016 and sells her house to buy a bigger, more expensive house. The safe harbor does not apply. The main reason for the sale is a financial improvement and does not qualify for a partial tax exclusion.
Great, you’re eligible for a partial exclusion! Now how is it actually calculated?
Same way as the “nonqualified use” case: it’s a percentage.
The IRS will multiply the maximum allowed exclusion (i.e., $250k / $500k) by a fraction.
The numerator is the lower of EITHER…
- (a) the duration the home was owned AND used as the taxpayer’s primary residence (looking back 5 years from the sale), OR
- (b) the duration from the taxpayer’s most recent prior sale for which capital gain was excluded under Section 121 to the date of the current sale
The denominator is: 2 years.
The numerator and denominator must use the same unit of time, so if you’re using days for one you also have to use days for the other; if you use months for one, you must use months for the other.
Let’s look at some examples.
Example 1: On January 1, 2016, Monica buys a home for use as her primary residence. 18 months later on July 1, 2017, she sells the home because her job gets transferred to another state. Monica may exclude up to $187,500 of gain from taxes: that’s $250k * 18 months / 24 months.
Example 2: On January 1, 2016, Jordan buys a house as his primary residence. On January 1, 2018, Jordan marries Holly and she moves in. On January 1, 2019 (12 months after Holly moves in), they sell the house due to a valid job change. Because only Jordan has satisfied the 2-year residency requirement, the couple cannot get the full $500k tax exclusion. Instead, their exclusion will be determined by calculating what each person would get had they not been married. Jordan can exclude his full $250k gain because he satisfies the residency requirement. Although Holly does not satisfy the residency requirement, but she can claim a partial exclusion due to the job change. She can exclude up to $125k, which is $250k * 12 months / 24 months. Therefore, the couple can claim a combined exclusion of $375k.
Notice one VERY important detail: Partial exclusions when you FAIL to meet the residency requirements are calculated by multiplying the appropriate fraction by the MAXIMUM permitted exclusion of $250k / $500k, and NOT by the ACTUAL realized gain.
In reality, then, getting a partial exclusion when you FAIL the residency requirement quite often means you can still end up excluding the ACTUAL entire gain from your home sale! That is true if your actual gain falls short of the maximum permitted exclusion.
In fact, if your actual gain is as shown below, you’ll still be able to exclude the full amount if you FAIL the residency requirement as long as your partial exclusion percentage is the corresponding amount:
By contrast, getting a partial exclusion when you PASS the residency requirement means you will definitely exclude LESS than your ACTUAL gain. That’s because the fraction (1 – post-2009 nonqualified use / total ownership duration) is applied against your ACTUAL gain, not the MAXIMUM permitted gain of $250k / $500k.
So if your actual gain is, say, $100k when you PASS the residency requirement, you’ll only get to exclude a fraction of that if you have ANY nonqualified use. Whereas if your actual gain is $100k when you FAIL the residency requirement, you can still exclude all of it as long as your applicable fraction is at least 40% if you’re a single filer ($100k / $250k) and 20% if you’re a joint married filer ($100k / $500k).
Is your mind blown?
What the IRS is encouraging with this is maneuvers to AVOID the residency requirement while creating a valid exception to still get a partial exclusion.
One last thing on calculating the partial exclusion amount.
If the taxpayer acquires a replacement home following a home conversion qualifying for a partial exclusion, the ownership and residency period carries over to that replacement home if the replacement home’s cost basis is determined using the involuntary conversion rules of Section 1033(b) of the Internal Revenue Code.
Example: On January 1, 2006, Sean buys a house as his primary residence that costs $200k. On January 1, 2016, a tornado destroys his house. Sean gets $550k from his insurance company. The destruction of his house qualifies for gain exclusion under both Section 121 and Section 1033.
Sean then buys a new house for $280k. Because he can exclude up to $250k of gain from taxes, for purposes of Section 1033, the amount realized is “adjusted” to $300k ($550k insurance proceeds less $250k exclusion) and the taxable portion of that is $100k ($300k “adjusted” amount realized less $200k original home cost basis).
Since Sean bought a replacement home for $280k, he recognizes gain of $20k and pays taxes on it now ($300k “adjusted” amount realized less $280k replacement home cost). The remaining $80k is tax-deferred ($100k taxable gain less $20k already taxed). The cost basis of the replacement home is $200k ($280k cost less $80k deferred gain). And Sean’s 10-year ownership and residency period from the original house carries over to his replacement house.
Two final notes about job changes, health, and other unforeseen circumstances
There’s a couple issues open to interpretation about the exceptions for job changes, health, and unforeseen circumstances.
One is whether the same safe harbor tests that apply to partial exclusions when you FAIL the residency requirement also apply to the nonqualified use exceptions when you PASS the residency requirement.
It seems reasonable that they would, but the Treasury Regulations Section 1.121–3 don’t explicitly confirm this.
The regulations were written to address cases where you fail the residency requirement. But the nonqualified use exceptions came later and only went into effect in 2009 — years after the regulations were already published.
Absent explicit IRS guidance to the contrary, I recommend you assume the same safe harbor tests apply in both cases.
Second is the nonqualified use exception that grants leniency for temporary absences not exceeding 2 years due to job change, health condition, or other unforeseen circumstances.
It’s not entirely clear what happens when an absence due to one of these reasons lasts LONGER than 2 years.
If you have a health condition that requires you to live away for 2 years plus 1 day, does that mean the first 2 years are validly excepted from nonqualified use while the last 1 day counts as nonqualified use? Or does it mean zero days are now validly excepted and therefore you cannot claim this exception at ALL?
I haven’t seen clear IRS guidance on this, so it’s something to discuss with your tax advisor.
A word about depreciation recapture
One other thing you should know is how Section 121 interacts with depreciation recapture.
Depreciation recapture is where the IRS taxes you when you sell your home for any cost basis you depreciated while owning your home.
Typically, you’ll depreciate your cost basis (property value only, not land value) when you rent out the home to a tenant. This helps offset your rental income which in turn lowers your tax liability.
You’ll typically depreciate using a straight-line method over a 27.5-year horizon. Your cost basis declines correspondingly with each depreciation deduction.
Incidentally, you should ALWAYS take the depreciation deduction.
Don’t think you’ll “save your cost basis” and avoid depreciation recapture by simply forfeiting the depreciation deduction.
That’s ‘cause when you sell your home, the IRS automatically assumes you have taken the depreciation deduction to its maximum extent for the entire period you rented out the property.
So the IRS taxes you on depreciation recapture whether you actually took the depreciation deduction or not. There is no way to avoid this. So you should ALWAYS take the depreciation deduction and find income to offset it against.
Google any of this if it’s news to you.
Anyway, when you sell the home, the IRS is gonna tax you on any amounts you depreciated if your sale price exceeds your depreciated cost basis.
The IRS will tax you a flat 25% on depreciation recapture, regardless of your ordinary income tax bracket.
Any capital gains above and beyond the depreciation recapture is taxed at normal capital gains rates, typically the long-term rate of 15% (or zero if you satisfy the requirements of Section 121).
What you have to know about how Section 121 interacts with depreciation recapture is that Section 121 exclusions and limitations never apply to depreciation recapture.
Section 121 simply ignores depreciation recapture and focuses solely on pure capital gains.
A quick example:
Say you buy a house for $100k. $40k is property value; $60k is land value.
You live there for 2 years. Then you rent it out for 2 years. You make no major improvements during that time. In each of those 2 rental years you should depreciate $1,454.55 of the $40k property value and deduct that from your rental income. $1,454.55 = $40k / 27.5 years.
At the end of 4 years you sell the house for $250k. Your cost basis now is $97,091 = $100k – ($1,454.55 * 2).
You will pay 25% tax on the difference between your original cost basis of $100k and your current cost basis of $97,091, so you’ll pay 25% tax on $2,909 REGARDLESS of what Section 121 says.
Then, having satisfied all the requirements of Section 121, you’ll pay zero taxes on the next $150k of gain, which is the difference between your original cost basis of $100k and the sale price of $250k.
Section 121 won’t help you with depreciation recapture even though you’re still well under the $250k exclusion cap.
All right, big post…and we’re curious what you have to say!
What other tips or strategies do you use to do tax planning for your home?
Let us know in the comments below!
Hi Andrew,
I am trying to determine if I would be exempt under the partial exclusion for a gain on sale of home and upon researching I came across this nicely written blog and wanted to get a second opinion on someone familiar with the tax code.
We purchased a home in April of 2018 with the intent of living there long term and it was our primary residence for the year we owned it. We relocated from another state for my job and my husband selected a job in a different town with our home located in the middle. Both of us had a 10-15 mile commute in different directions. We were hoping he would get a job at this place and did not have intentions of leaving. However, he got an opportunity for a job with better hours (same pay) in the same town as me a few months later. My husband is a Registered Nurse, and the new job offered 8-4:30 M-F hours which is difficult to achieve in that field so he jumped at the chance.
The house we bought was small, but it offered a lot of potential with a large lot so our plan was to build a new house on the same property in a year or so. However now that we both work in the same town we started to wonder if it made sense to commute back and forth, especially factoring in that it would be a 40 minute drive from work to where our kids would attend school. We ended up purchasing a home much closer to where both of us work and decreasing the drive to school significantly in May 2019.
We ended up selling the home for a gain, it was just the market swinging in our favor not our intent to move. Would we still be exempt from paying the tax? If you have any follow up questions please let me know.
I look forward to hearing your thoughts!
Thanks,
Heidi
Hi Andrew. Would really appreciate some advice on my situation. Bought a home (property “A”) way back around 8/2003 for $190K. Lived in it for nearly 12 years straight, then we purchased a new home (property “B”) around 4/2015. We had kept property A and rented it out from 7/8/15 until around 1/10/18. And i sold property A on 7/5/18. This had a total gain on sale of ~$80K
The tough part is my trying to still dig up old paperwork for confirmation of when we actually moved OUT of Property “A” and into Property “B” in determining Primary Residence status. It’s hazy since we didn’t immediately move into property B on the 4/2015 closing date, as we had some pre-move-in work done on it, while also doing some pre-renting preparation work on property A. From recollection, we really didn’t move out of property “A” until we had it pretty much ready for rental.
Now to complicate things a bit more, we also just recently sold property “B” on 3/15/19. We lived in this home the entire time owned, from the ~mid 2015 until the 3/15/19 sale (well more than 2 years). This had a total gain on sale of ~$95K
So for property A, there was possibly a tiny period before the tenants moved into it 7/8/15 as well as the period between 1/10/18 (when the tenants moved out) through 7/5/18 (when we sold it) that the home was being prepped for sale/etc
Now…….. I’ve filed an extension for tax return filing of 10/15/19. I’m naturally trying to finish up these taxes today.
So my main questions………… if i can find proper paperwork to confirm that we DID cover the 2-of-5 year PRIMARY RESIDENCE rule on property A before we sold it, then it sounds like i should be able to exclude that entire gain on sale, correct?
HOWEVER, since i also sold property B within less than 1 year from the sale of property A, the IRS rules seem to dictate that i cannot exclude the gains from BOTH(??)………even though my property B was easily a primary residence for 2 of the last 5 years of owning IT.
If so, Do i effectively have to choose which one i will take the capital gains on? If so, then i’m also trying to determine if it’s as simple as choosing to take the tax on the one that has only the ~$80K gain instead of ~$95K gain, since it’s a lesser gain to be taxed……….OR……..if these various “partial exclusion” and/or “qualified vs non-qualified use” rules don’t make it that simple?
Any advice would be appreciate. I realized you are not a CPA…… thank you
Hi Andrew,
Great article! I’d like you advice on our situation. I’m getting conflicting information from different sources so I wanted to get your take on our situation…
We were living in our primary home since 2005 in Florida. In mid-2012, we noticed sinkhole-like activities and damages at our primary residence. (cracks, noises etc) Reported it to insurance company and engineers and insurance company investigated for a year.
In mid-2013, we received the final inspection report. While no sinkhole was found, serious settling issues were found which made us very uncomfortable to continue staying in that house with a 4-year old child. Due to the report findings, we decided to sell the house in 2013 but since we were seriously under water with the mortgage we could not and our only option was to rent it and move. We had the home rented from 8/1/2014 until 8/1/2018 and then finally sold it by 10/26/2018.
Looking back and using the 5/2 rule, ownership eligibility is ok, and use eligibility is 12 out of 24 months.
Do we qualify for partial gain exclusion?? One of the issues we seem to be having is the “sale or exchange are proximate in time” part of 1.121-3(b)(1). Do you have any possible ruling that you know of that would support partial gain exclusion?
I’d appreciate your thoughts.
Thank you, Zee V.
Hi Zee, ack just saw this. That’s a unique situation. I don’t have a ruling that’s directly on point for your case. The proximate in time issue may be problematic since you didn’t dispose of the property for 6 years. I would urge you to talk to a CPA who specializes in RE to get a firm opinion….
We owned a condo and rented it out for apx. 20 years. We have never lived in it. We recently sold it. Is there any way for us to reduce our capital gaines tax? Thank you –
Hi Andrew, Great article! My question concerns how the IRS determines the dates for when a home is considered a primary residence. My daughter bought a property on 4/25/14 but I renovated it for her and she didn’t actually move in until Oct ’14. Which date is considered her occupancy date? Does the IRS look for purchase date? Utility bills?
It’s her only property and she moved to Mexico in Oct 2016 though didn’t rent her house out until Dec 2016 I believe. Will the IRS consider her last date as primary residence when she went to Mexico or when she first rented it out? She realizes that she needs to sell this year to lock in her tax free gains but we’re uncertain just when she needs to sell it by. Thanks!
Date she actually moved in, date she moved to Mexico. If you argue otherwise, you’d have to be able to show evidence to the IRS.
Thanks. What evidence does the IRS look for in a situation like this? After talking with her I learned that she continued to pay the utility bills in her name and the first lease didn’t start until June 1st 2017. Wouldn’t both of those facts count as “evidence” with the IRS?
Hello
I have owned my home since Sept of 2016 it’s been over two years but not quite 5 years. Do I have to wait until the 5 years? Or can I sale now and be exempted from taxes? It’s just not so clear when it says the last 5 years.
Thank you so much for your help.
You do not have to wait until 5 years. You can sell and claim the exclusion once you have lived in the unit as your primary residence for 2 years.
Hi Andrew,
Great Article!…and thank you for responding to the comments. I’ve read the article and the comments, I somewhat got some of my answer but not quite there.
I closed/purchased a home 31Dec2014. Lived there until Sept 2016, rented it out Nov.2016 and moved out of state for a job (job offered Oct2016), I came back 9months later and continued to rent the property. Is this partial exclusion? If I decide to move back in Aug or Sep 2019 to fulfill the 2yrs marked, will I get the full exemption? Thank once again!
I bought a house in April,10th, 2018 and don’t live in there. It is still under construction, new flooring, plumbing, electric, walls, kitchen, bathroom and painting. I cannot move in yet until is all done. Also has new furnace and water heater as well.
My question is: Do I still have to pay capital gains tax if I didn’t live in the house yet? but it is in my deed name. I own the property? Any advice would be great, thanks.
Hi Andrew,
I’ve written to you before but now that I’m filing my taxes, I just want to make sure I understood this correctly.
I bought my house in 02/2011 and sold it in 02/2018. I lived in the house from 02/2011 to 02/2016. I got married and moved out of state in 02/2016 but my spouse never lived in the house. I never rented out my house after I moved away–my sister lived there rent-free from 02/2016 until 02/2018 when I sold the house. Under the ownership rule, I qualify for the capital gains exclusion but I think under the residency test, only I qualified for the exclusion, correct? Or since my spouse and I are filing jointly, I don’t get the residency test at all (and can not use the exclusion? I am just a little confused since my spouse never lived in the house and now we are filing our taxes jointly and I was wondering if I could use the $250,000 exclusion for the sale. Fate would have it that I gained $250,000 after fees/deductions from the sale.
I look forward to your response
Alice, please check out the section in the post re: married taxpayers.
I have same question and am also confused. Waiting for reply.
I am so glad to be coming across this site- My situation is different me and my husband bought this house in 2002 and lived there till June 2010, we bought a second house and let my my brothers family live in our old house up till we sold it oct 2018. Me and my husband we live in our other house the one we bought in 2010. How would my tax situation will be when filling here this year.
Hi,
I lived in the house from 2003-2018, and will start renting it in 2019. It seems like I have to sell it within 3 years before capital gains taxes kick in. But how much of the equity is subject to capital gains if I sold after 3 years? All of it, or a portion since I lived in it for 15 years?
And would my starting amount be to determine any capital gains? I built the home, I didn’t buy it from anyone. The only sale ever recorded was when I bought the land 2 years prior. That was about 50k. My bank loan when I built the house was 240k. The house is probably worth 375k now, which was unfortunately isn’t much higher than it was worth in 2003 when the market’s were way up.
Any help would be appreciated!
– Jason
All of the gain is subject to capital gain, not all the equity. You have to determine how much capital gains tax exposure you have. You need not buy from someone to have capital gain. Your basis is the 50K for the land + any funds you spent to build + labor costs you incurred for the same (your own labor doesn’t get added in though).
Hi Andrew, excellent blog.
My situation is that I missed the two year residency requirement by one month. The main thing that prompted us selling when we did was due to murder that literally occurred right outside our house, the perpetrator lived within the community, we wanted out of a place where such things occur right away, we have two small children to think of. Do you think there’s any chance of claiming the partial exclusion in this scenario?
Hi. Thank you for this great article.
I am active duty Air Force and understand the home use provision is extended 10 years for service members.
But how does the new 2009 law affect that 10 year extension? I bought and lived in a house from 2001-2006, then moved due to military orders. I converted the property to a rental since 2006 and will sell this year in 2019.
Andrew,
We have owned our house since 2011, but had to move in 2015 due to a change in my husband’s work. On December 1 we will officially have lived away for 3 of the last five years (and our 2 years will begin to erode), but we have the house rented until June 1, 2019. Your last comment (“Second is the nonqualified use exception that grants leniency for temporary absences not exceeding 2 years due to job change, health condition, or other unforeseen circumstances. It’s not entirely clear what happens when an absence due to one of these reasons lasts LONGER than 2 years”) has me thinking that there may be some wiggle room for us in there somewhere, but are we just SOL? I really need some guidance here and my tax guy doesn’t seem totally up to speed in this area.
Hello Phoebe, seems like you will be subject to capital gains taxes on the sale of your home and not really possible to avoid that. So it just depends on whether you want to lock in your appreciation now by selling vs. holding onto the property with the intention of moving back to WA someday. If you foresee moving back within a few years, it might not be worth the hassle of selling right now, only to have to potentially buy a new (more expensive) property in a few years when you move back.
Andrew, thank you for this detailed article. I came across this while trying to figure out my capital gains for a duplex sale. Can you offer any advice on the following scenario:
+ June 2009: Purchased “Duplex” (technically the building is split 2/3 and 1/3), but I’ll call it a “duplex” as that is the common keyword that will allow others to search/find this comment. The building has two separate dwelling units, each with its own separate entrances, utilities, kitchens, living spaces, etc.
+ Unit-2: Always rented from 2009-2017. All rental income and expenses (fractional expenses attributed only to Apt-2) declared in Schedule-E. Similarly, 1/3 of the original structure cost (calculated only for Apt-2) was depreciated, starting in 2009.
+ Unit-1: I lived here as my primary residence from June 2009 – Dec 2015. Rented from Dec 2015 – April 2017 (16 months). Starting with 2015 tax filings, I listed its income, expenses, and depreciation in Schedule-E, in separate column in Schedule-E (I always treated both units separately)
+ July 2017: Sold “Duplex”
My first assumption is that I will pay all of the capital gains tax attributed to Apt-2 (the full-time rental unit). My second assumption is that because I lived in my former primary residence for at least 24 months of the previous 5 years, I can exclude the first $250K of gain attributed solely to Unit-1.
I’m sure of the first assumption, but can you please confirm my second assumption? Are there any concerns or complications due to the fact that I receive rental income on Apt-1 in the year I sold the home? There are some statements at the top Pub-523 Page-11 that are confusing to me.
Thank you,
Kevin
Hey Kevin, based on these facts both assumptions should be true/correct. Receiving rental income in the year of the sale doesn’t alter one’s eligibility for the exclusion so long as the requirements are met. The rule doesn’t care about rental income; it cares whether you fulfilled the residency requirement. Best of luck!
Thank you for your reply. This is good news. I’m still a little confused about the comments at the top of Pub-523 Page-11. Do those instructions not apply in my case, because I wasn’t renting a “portion of your home for business”. Instead, Unit-1 was either fully a permanent residence, or fully rented. My scenario seems like a common occurrence for duplex owners, so I wish the IRS included this scenario in their own FAQs.
I own a commercial building and lease offices. I also have my residence in the building for 5 years. When I sell it will i have to pay sales tax on it since I it is also my home?
Andrew my husband and I and my brother and his wife bought a big house so we we could all live together and take care of my 94 year old Mom. We purchased house In Jan 2016. Unfortunately Mom was placed in nursing home shortly thereafter and husband and brother did not get along. We moved out in May 2017. Brother and sister In Law would not buy us out of house so we had to file a partition suit. They finally agreed to sell house it was listed in dec 2017 and finally sold In July 2018. My husband and I lived in house for 12 months but owned 50 percent of it for 2.5 years. Can we qualify for unforeseen circumstances. Our gain was only about $9000. Thank you
Hi
Great article. This seems like a great tax advantage. So if I understand it you can buy a house improve on it over 2 years that you are living in it and then turn around and sell it for profit and as long as the gain is no more tha $500 k you keep all of that money. And then you could do this all over again. Theoretically you can make $500k tax free every two years forever? Am I understanding that correctly?
Loved, loved, loved the timeline graphs and scenarios. Made it a LOT easier to understand how to interpret this tax code in the context of everyday life. I particularly liked Example #3 since that one really helped clarify interpretation of the non-qualified use rule pertaining to the date of last residency. That one is non-intuitive. VERY helpful. Thank you!!
So glad it was helpful!
Hi,
I own a home that I rent (for the family discount, lol) to my daughter and her boyfriend. We do not have a rental agreement just verbally decided on what was expected. I still pay the school taxes etc. and have homeowners insurance. I got married in June 2017 and live with my husband in another location. I do not pay rent. We are getting ready to retire and build our own home in the country. I do not want to sell my home and keep it as a residence for my kids. I am worried that when I go to sometime down the road maybe 5 to 7 years sell my home I will have to pay capital gains taxes. I bought my home in 1988 (original owner) and paid $99,000.00 and now I could probably sell it for about $200,000. My new tax person said I will need to sell my house within 3 years. Please advise me on what to do going forward. Thanks, Linda
Hi Andrew,
My partner and I (married) have owned a house together since 2001, which we re now going to sell. We have always rented as our principle address, and have use the house as a weekend house. It was never rented. The house and we are located in California.
We do have a P.O. box for bills, etc. for the house. It was purchased for around $240,000, and the asking price is around $675,000. We have probably put in about $400,000 in a major expansion (construction), remodeling, and landscaping over the years. I assume we don’t meet the residence requirements, but is there any way to reduce our tax exposure?
Thanks,
Albert
Hi Andrew thank you so much, I think I got my answer but just to be safe I wanted to ask directly.
My grandmother died in May of last year. She had deeded her home to me in November of 2014 but I did not live there at the time. I did live there up until September of 2014 and moved right before she deeded it to me. I sold the home I was in May of this year and claimed the excemption. Now I’m in the home she had deeded me but realize I cannot afford it due the heavy debt burden of $300,000.
Can I get an unforeseen circumstance exemption and if so the house has been my primary residence since March this year and it was also my primary residence since before September of 2014. Thanks so much for the article!
Hi Andrew, thanks for the informative post. A question if you don’t mind double checking my plans:
I bought a condo in 6/2013, and lived there until 7/31/2015, when I had to move out of state for work, and started renting it out from 8/1/2015 onwards. I’m planning to sell it soon for about 40,000 in appreciation. If I understood your post correctly, if I close the sale by 7/31/18, then I won’t need to pay capital gains tax since I’ll have lived there as primary residence for 24 of the last 60 months. But even if the condo stays on market for longer and the closing isn’t completed until 9/2018, I should still be able to avoid capital gains since moving for employment gets me partial exclusion? 22/24 x 250,000 give up to 229,000 in max exclusion, much greater than the anticipated gains.
Thanks in advance!
Sounds right, if the facts are as you say.
This is an EXCELLENT article!! Would you be able to give me advice on my situation? (I browsed the comment but have a more specific question).
We purchased or home in December 2014 for $410,000 in California.
My husband’s job took us out of the country in November 2016 (just one month shy of 2 years).
We rented until March of this year, when our tenants moved out. We cannot cover the mortgage with rent alone, so each month we took a loss.
We decided to sell and opened escrow April 27th 2018. We still live out of the country.
Can we qualify for an exemption, even though we were one month shy of living in the residence for 2 years? And more specifically, are their any expeditions for California State Law, as they are saying we will owe an estimated $18,000 in sale taxes!!
Any help you can offer would be GREATLY appreciated!!!!
I am a mortgage lender and we have a transaction that hinges upon which date satisfies the standard of having owned a home as a primary residence for “two years.” It might seem like a simple question but I have had a difficult time finding a direct answer. A seller bought his home on May 19, 2016. Can they close on the sale of that home on May 18, 2018 or do they have to wait until May 19th to have owned it 2 years? A calendar begins on January 1st and the year is over on December 31st but does the IRS allow you to sell on that final day or do you have to wait until the following day. In this case, May 19th is a Saturday which pushes the next business day to Monday the 21st. Do you have any insight for us on this matter? I appreciate the detailed information in your article. We would appreciate your opinion on this matter.
My view is, you can close on May 18, 2018, and still satisfy the rule. See IRS “Topic No. 701 Sale of Your Home” – https://www.irs.gov/taxtopics/tc701
In particular, the quote: “…you must meet both tests during the 5-year period ending on the date of the sale.” ENDING ON the date of the sale. To me, that says you get “credit” for May 18 because that is the date ending on the date of the sale.
But why not just roll it to Monday 5/21 to have absolute peace of mind? I would probably do that if it doesn’t screw up the deal.
NOTE: I am NOT your tax advisor so do not interpret this as official/formal tax advice. This is just my layman’s opinion. You must consult a tax advisor or attorney for a formal opinion.
Hi, I recenlty purchased a duplex mother/daughter style condo so that my mother could live on the first floor. She was a cancer survivor. Four months after the closing, during the renovation, my mother passed away. She was 80 but in remission and in reasonably good health. Now I have a too big apartment that I want to sell. Does this meet the exception to the 2 year rule? Thank you.
Great blog!! I have a scenario I wanted to run by you. It says that you need to be living in your primary residence right before a move to qualify for the partial exclusion to the two year rule. If my husband got a job in a different state and moved ahead of me by 5 months or so, would I be able to use the job exclusion even though he wasn’t living in the house but I was? I would want to join him but wouldn’t be able to move right away. When we would be selling would be after owning for 21 months.Thanks for any help you can give me.
Not sure that you will get this but what I’m getting is that I bought my house for $300,000 and put $75,000 down. Now after 6 months (25% of my 24 month requirement) that my wife and I want to move out of state. Put exemption is $500,000 for the 24 months but we stayed 6 months this the exclusion would be only 25% of the $500,00 resulting in a $125,000 exclusion correct? So as long as we don’t sell our house for more that $350,000 (or would it be $425,000? Do you count the cost of the home or the cost after the down payment?) Would bring less than the $125,000 in profit so we could be take the partial exclusion then? Sorry if I’m confusing and thank you for your time
What if you rented the house for a while(it was for a health related reason, but I never saw a doctor so I doubt there would be any exception there), but have been living in the house for the past 5 years? I read this whole thing, but that never seemed to be brought up. Do they only look back 5 years? It seemed to be implied, but was never stated outright other than when using the “2 of the last 5 years” thing.
I’m curious if someone could theoretically rent their house for a decade, but prior to selling, just move back for 5 years, sell, and capture the entire exception.
First: You only need to live there 2 years, not 5. The 5 year thing is just the look-back window, not the duration you have to live there. Second: you could do what you said, but you still wouldn’t capture the entire exception bc of the law change in 2009, which the article above discusses. If you move back for 2 years and then sell, you’d only be able to capture part of the exception due to the new rules in 2009.
Right, I understand that it is the window of time they look back at, not how many years you need to live there, which is EXACTLY why I’m asking: if an owner lived in their house for the last FIVE years(i.e. the entire period of time that they look back at according to this article), shouldn’t they be able to capture the entire exception?
In this hypothetical, the owner is not moving back for 2 years, they are moving back for FIVE years. And if they only look back 5 years, and it was the owner’s primary residence for the last 5 years, wouldn’t they be able to capture the full exception? It doesn’t seem like you have addressed this yet.
Yeah, that’s what I’m saying: you cannot capture the entire exception even under your “5-year scenario” due to the new rules in 2009. Go back and read the part of the article addressing the new rules introduced in 2009 as it explains it there.
I did read it and the needless complexity of the law made my head explode. So the 5 year look back is only to determine residency status, but the actual taxation percentage is still based on the total period of ownership, not just the percentage of the last 5 years?
But what if I owned the house for 8 years, and lived there for the last 5 years instead of 2 years? In this case the percentage of time I lived there is now significantly greater, right? It didn’t seem to address that this percentage is based on the entire period of ownership, because most of the scenarios just focus on the last 5 years.
So here is what my original plan was based on my own property before reading this:
Bought home in May 2013
Lived as PR until December 2015
Rented from January 2016
Stopped Renting January 2028
Lived as PR until April 2030
Sold
My hope was to capture the entire exception using this, but it would appear that I could only capture a small portion of it. I still don’t understand, if I lived there for more time prior to selling, would that effect my taxes since the total ownership percentage would be greater, or would it not matter at all, as the article seems to imply that I can, at most, get 2 years exempted.
Why does tax code say two of the last five years ? What does the five years have to do with it?
I am a single woman. I bought a house in WA in 1991 for $52,000, and lived in it from 10/1991-9/2004, at which time I moved to SC to live with and help my elderly parents (in their early 80’s). I have been renting out my house since 10/2004. I am still in SC living with my father, who is now 96 (my mother died in 2012), and I have been offered $270,000 for my house. I want to sell it, but from what I have read here, it does not look like I would qualify for exemption from capital gains taxes. What do you think? My plan was to return to my home in WA after my father died, but he keeps on living, and being a long distance landlord is getting more and more problematic. Any suggestions? Thank You!
Hi Andrew,
I purchased my home in California in 1999 for $350,000.
In 2009, I was unemployed and the only job offer forthcoming was in Canada, so I moved and began renting the California condo on January 1st, 2010.
Since then, I’ve lived abroad and have been renting the condo.
I’m now in difficult circumstances and need to sell the condo, estimated sale price $800,000.
After selling expenses and adjusted basis, I expect the gain will be around $450,000.
Although not eligible under residency, safe harbour distance does apply, but since period is greater than two years, would ‘job change’/’unforeseen circumstances’ exceptions be applicable?
Thanks,
In 2006 my Mom gave me her house with the agreement she could live there as long as she wanted/needed. So no rent was paid to me. I paid taxes and insurance and upkeep.
She passed away last week 2/2018. Now I want to sell the house and split it with my two sisters. House is only worth around $110,000. I did live in the house on and off taking care of my Mom during her cancer battle. probably well over 2 years of the last five, but didn’t document or change my mail from my other house that me and my wife own.
Do I need to claim any of the sale on my taxes?
Hi Scott,
Did you ever get a reply to this question? I am in the same situation.
Hi Andrew
We are a British family and moved to the USA August 2017. Prior to this move we were on an ex-pat contract in Dubai for 4.5yrs (this meant that my husband would return to UK at the end of this period to our family home). However, the company offered him a new role in the States on a ‘local’ contract at this time and we moved. We have a family home in the UK that we have owned since 1998 and now want to sell it but we are unclear if we would have to pay gains tax as we weren’t resident in it for two of the last five years due to the temporary relocation move to Dubai with my husband’s company. Do you have any idea if we would be exempt from gains tax on this basis?
Many thanks
Hello, my husband and I built a house and it just was completed in January 2018. We bought the land 2 years ago but have only actually lived in the house for a few months because it was being build. We have decided to get a divorce and need to sell the house because we can’t afford it separate. How does this work for tax purposes? Do we have to pay capital gains on the proceeds? (we will make around $250,000 together off of it.
Hi Andrew, My husband and I married in 2014. He lives in Oklahoma and I live in Missouri. We live 4.5 hours apart and see each other on weekends. My house was purchased in August of 2007 and his house was purchased in July of 2009. His name is not on my deed and my name is not on his deed. We just purchased a new home together in Missouri as my husband is retiring and can now move to Missouri.
When I sell my home in Missouri, I should make a profit of $100,000. When he sells his home in Oklahoma, he should make a profit of $30,000. We are going to the take the profits and pay down on our loan on our new house using a “recast” strategy. The bank will recalculate the payments and we get to retain our low interest rate. Will each house be entitled to a $250,000 exclusion? Or will the IRS look at the sale of one of the homes as a capital gain? Neither property has ever been rented as he has been living in his house and I have been living in my house.
One sale will get the exclusion, and then you’ll be “throttled” on the other sale. See the article section above re: married spouses. Strategically, I would do the $100k gain home first, get that exclusion. Then wait 2 years and sell the other one (if you can afford to hold it) to get the other exclusion. Alt: sell the $100k one first, and then sell the $30k right after that. You’ll pay taxes on the $30k gain, but it’s a lot less than the $100k.
Thanks for your advice. Talk about a marriage penalty. This seems so unfair. Why would it matter which is sold first if they are sold in same year?
Hi,
I have a question. The house that my uncle lives in is in my name. It is value around $20k.. He pays the utilities. There is no rent or mortage. He is wanting to sell the property due to health reasons but is worry about the taxes that will be due. I don’t have any other property and live with relatives. Can someone please tell me how I could figure out what taxes and captail gains I would have to paid. THanks f
My husband and I are selling our home and buying another one in another town. We have lived there since May 2015 and rented from my brother in law, then we assumed his loan on 2/17/2016, my brother in law purchased the property himself in 2008. We’ve claimed primary residence since 2015, but it wasn’t deeded to us until 2016…would we still have to wait until AFTER 2/17/2018 to close on the sale of our house? Thanks in advance!
Hi Andrew,
Thanks for the article! What you are saying in “Example #3: Let’s add some spice…” agrees with what my accountant says, but I can’t find an IRS pub or tax code which supports this idea that the IRS only cares about periods of non qualified use within the 5 year look back. For instance please consider the following: if someone used a house as primary residence for first year of ownership, then rented it out for next 6 years, then lived in it again as primary residence for next 5 years and then sold it. Are you saying that the the last 5 years of ownership, the look back, and zero days non qualified use that the owner would qualify for full capital gains exemption, without pro-ration for non qualified use as per Pub 523? That would be great. Do you know that tax code supports this? Thank you
No, in your example, the 6 year rental is nonqualified if it occurred after 2009. In my example “Let’s add some spice” the rental period does NOT count as “nonqualified use,” even though Victor and Victoria weren’t living in the house, because they moved due to a job rotation which is a valid exception. You’d have to have a valid exception for your 6 year rental to be free from the nonqualified use restriction. See IRS code: 26 U.S. Code Section 121(b)(5)(c)(ii)
Thanks for you clarification !
We paid $17,000 for our home in 1959. Now, a widow of a veteran, I lost my son in 2017. He has lived with me 4 months of the year every winter since my husband died 9 years ago. I was able to live in my home alone because he took care of everything, even fixed my meals. Six months after he passed I could no longer manage alone and moved to a retirement home in another state, only a mile from my daughter’s family. My home is for sale at $215,000, but I may have to take less. Regarding my income, I should qualify for tax exclusion, but considering my reason for moving, would I qualify?
Hi, and thank you for the very detailed article. I recently sold a home that I partially inherited back in 1997. I lived there until 2007, when I married and changed my DL to my new location out of state, but moved back in only months later, after separating from my new husband, whom I officially divorced in 2009. In 2012 I moved, again, and rented it out until 2016, after which it sat empty until it sold, one year later. Over the 20 years that I’ve owned it, I’ve poured thousands upon thousands of dollars into fixing it up, but failed to keep any of the receipts until I began renting it – plus most of the work was DIY. How on earth do I begin to figure out such a mess? Thanks, and Happy New Year!
I have been living with my girlfriend in a house I own as my principal residence for five years. We both have proof that we have been living there for five years. If I married her tomorrow and sold the house the next day, would I get the full $500K exclusion, or something closer to $250K. My house has appreciated $500K, so this is an important decision for me.
Hi Andrew, this post is amazing and so helpful. Thank you
My 2 questions are: are all the years of ownership/resident prior to the last 8 are automatically discarded?
How does non-residency timeline starts when a resident moves out to rent in the middle of the year?
Bought a co-op at the end of 2007, lived there 9 years and 315 days until having to move out on 8.31.2017 (& rented starting 9.2017) to complete 1-year contract 3000 miles away. If offered another employment after contract ends and continue living in new relocation what’s the latest month/year in the future when closing sale would have to happen to avoid capital gains taxes?
Also if a single person does not qualify for the living at property the last 5/8 years but the gain between price bought & price sold is less than 250,000, are full capital gain taxes due for less than 250,000 gain?
If an owner does not meet the last 5/8 years residency reqs but uses the gain to purchase another home, what’s the longest length in months that new closing should happen to avoid capital gain taxes?
Heard both that the capital gain exemption for home residents can only happen once within a lifetime and also that it can only happen every x/y years? Which one is true?
Luckily, at the very last minute, Congress decided NOT to change the home sale tax exclusion rules, so all the old rules still apply under the new tax bill (i.e., 2 out of 5 years, not 5 out of 8 years). As for the answers to your specific questions, Claudia, they are ALL answered in the article, so if you read the article all the answers are there.
Hey Andrew!
Happy New Year! Is that true? That they didn’t change the rules on the home sale exclusion tax? That it’s still just 2 out of the last 5 years?
Yes
what type of documents to approve that I live in the primary house in Brooklyn,New York?
Come to this point, my driver license address is not the primary house address, due to the cheaper insurance rate I use the other house address. my electricity bill is not my primary house address neither.
I have water bill, Gas bill and major credit card,bank statement with the primary house address.
Is that enough evidences to approve that I live in the primary house?
Thank you in advance for your reply.
Andrew
When you sell the house, your agent will have to file some paperwork and you’ll need to show it’s your primary residence at that time – they may look at whose name is on title, where the property tax bills go, voter registration and DMV records, as well as other bills/documents (like the ones you mentioned) to show you lived there as your primary residence. AFAIK, there isn’t an official list of documents that will prove primary residence status, so it’s a good idea to talk to a tax advisor about your specific situation.
I paid 400k. I refinanced for home repair and new loan principle is 700k. If I sell my home married for 1.2 will I owe any tax?
lived in house for 18yrs
Andrew, any chance you can give me your take on my question below from a few months ago? If I lived in the home for less than two years (18 months) and owned it for less than five years (54 months) and I moved due to job, can I still qualify for partial exclusion on a $109k profit. MARRIED filing jointly.
“The new legislation requires living in the house 5 out of 8 years, up from 2 out of 5 years. It retroactively dates back to the day the tax legislation was first introduced (couple weeks ago), so if you weren’t already in contract to sell by then, AND if Congress ultimately passes the legislation (TBD), you would be subject to the new rules immediately, not the old ones ”
Where can I find this? My Realtor is advising me to list my house before the end of the year if I am going to move in 2018 and even If I don’t sell it will still apply 2017 rules?
It’s too late to qualify for the 2017 rules now. If you list your home for sale now, you will be subject to the new tax bill rules, as the house and senate have reconciled their bills and it will almost certainly be signed by the President before end of year. In terms of the retroactive date application, you can just read the tax bill itself to find this.
Correction: you’re right, I just checked the Senate bill and it says: “The proposal is effective for sales and exchanges after December 31, 2017.” So if you are in contract before end of 2017, you should be fine under the old rules.
Wait! Does this mean that if you put your house up for sale before the end of 2017 and even if it’s sold in 2018, you can still qualify under the old rule?
Not just put/list your house for sale. You’d have to actually be in contract. And then the contract would actually have to close. So if the contract fell through in 2018, you’d lose the 2017 benefit.
Andrew,
Thank you, this is an excellent post. I was in contract to sell and buy before the end of 2017 and my closing date is January 3rd. Is both my purchase AND sale under FY 2017? Could I can claim moving expense deductions under FY 2017 even though the move date is January 3rd?
Don – yes both purchase and sale is under 2017 rules if you close in 2018 bc you were in binding contract in 2017. No, your moving expense deductions will not be deductible if you move in 2018, regardless of your house situation – those are separate issues.
Hi ANDREW,
Thank you for such a detailed article. I think I almost got it! How does the IRS confirm the exact date of your having vacated your primary residence? Got my place in 02/2011 in WA, then got married in 08/2015 to someone in TX and was going to locate there right away but couldn’t find a job in TX so I was partially going back and forth between my place in WA and my place in Texas until 02/2016 when I finally found a permanent job in Texas. Do I have to worry that I wasnt living at my place in WA full time?I have never rented out my place in WA as I let me sister live there rent free and I stayed there when I’m in town. I changed my address to the Texas address in September 2015!l but didn’t get my Texas license until 03/2016 after I moved permanently. In any case, I am now going to sell my place in WA in 2018 and think I may qualify for the exemption but I think I only have until 02/2018 to close on the house if I want to get the full exemption right?
For determining when you switched residences, the IRS would probably look to objective indicators like when you changed your driver’s license, voter registration, etc. It’s not really about whether you were physically residing in the property 100% of the time, as long as you were not renting it out (which sounds like you weren’t), although if you were residing there very little, that may be problematic. Basically, you’d have a good case that you were residing in the WA house until you took objective actions to change that (driver’s license, voter registration, etc). For the tax exclusion, you should know you most likely cannot qualify for the 2 years out of 5 years rule anymore because Congress already passed new legislation requiring 5 years out of 8 years in order to qualify for the tax exclusion – that legislation is simply awaiting the President’s signature which will most likely happen before end of 2017.
Thanks so much for the response! It appears that the new 5/8 yrs will get passed for next year. I think I still qualify even with the new rule, right? 02/2011 to 02/2016 (5years) out of 7 years that I owned the home? Also, from 02/2016 to now is NOT a non-qualified used if I understand that part correctly. Looking forward to your response!
You’re right, I just checked the Senate bill says: “The proposal is effective for sales and exchanges after December 31, 2017.” If you sell in 2018, as long as you can convince the IRS you resides in your property for 5 years, then you should be fine. The period from when you move out to when you sell is not considered non-qualified use.
Hi. I’m going through a divorce and my husband and I are selling the house which we have owned for 15 years. In October, 2013, I moved out due to abuse, etc. I haven’t lived in the home for two out of the past 5 years and now that we’re selling, I’m afraid I’m stuck with capital gains while he’s had the luxury of living in the home. Do I qualify for any type of exemption?
Also, we have purchased and sold several homes over 25+ years and always reinvested any gain on the properties. Do I have to pay tax on those gains too? Thank you.
There’s 2 issues that matter here: one, the date you sell the house (it depends on whether you’re still married on that date); two, your filing status at the end of the tax year in which you sell the house. You *might* qualify for some tax exclusion even if only your husband has been living there the last few years as long as the house is sold before the divorce decree is finalized. You should consult a tax advisor to understand the exact amount of exclusion you would be entitled to in this scenario. And then, how much exclusion you can gain depends on your tax filing status at the end of that year. You should read the section above “What other special rules apply to married taxpayers?” to get a feel for what could happen, and definitely consult a tax advisor or CPA.
Hi Andrew, wow what a great site! Read all the blog but have different situation and could not find answer needed. Maybe you can help! My mom owned her house for 45 yrs. At 80 yrs old found out she had leukemia/terminal and needed to be cared for 24/7. Mom decided to sell her house and contribute $200,000 of the proceeds toward a new house for all of us to live in and care for her. We found and bought a house for 267,000 and financed it with plans of refinancing when her house sold. Mom took a turn for the worst and I had her quick claim/inherit her house deed to Me. She passed before her house sold. Now 7 months later we are in process of closing the sale of her house for 237,000. The new house is in my and my husbands name only and We wanted to know if we can avoid capital gains by taking the money from the sale of her house and refinancing it into our new house as we planned! Thanks for your help!
Based on your facts, you probably cannot avoid the cap gains tax. It would have been better to work with a tax advisor before purchasing the new house because there may have been a way to defer taxes using a Reverse 1031 Exchange. But that has certain hoops you must jump through to qualify, which you haven’t done unfortunately.
Hello Andrew C, this is the best article on cap gains ever! Thank you so much. My question is:
I bought, lived and worked in a Co-op for more than 30 yrs. I also bought a small house which has been “under water” and worth less than the mortgage using it only on the weekends.
I lost my job last year but being 64 yrs old I have not and probably will not be able to find another job.
Do I have to pay cap gains tax if I buy a Condo for the money I sell my Co-op for?
Also, how do I prove Primary Residency?
Can I offset losses from one property towards the gains from another?
Thank you, Barbara
Hi,
I purchased a townhouse for 72K$ on October 3, 2014 and lived there till June 30th, 2016 (primary residence for 20 something months). I moved to another state for s job change, and rented the townhouse on July 1st,2016. It is still rented. When is the threshold date I should sell the house (for around 150-200K$)by then, so I will be tax exempt?
If you were to sell (and close) the transaction today, you would be eligible for a partial exclusion (due to your job change which would qualify as an unforeseen circumstance, assuming your new job in a different state was at least 50 miles further away). That would likely allow you to exclude all your gain from getting taxed.
However, if you close the transaction after Congress passes the current tax bill (already passed the House, awaiting passage in the Senate), then you might not be able to exclude any of the gain. That is because under the new tax legislation, you would have to reside at the property for 5 out of 8 prior years to qualify. There may still be a safe harbor that allows partial exclusions for unforeseen circumstances like job changes, but at a minimum, for you, it will be less than the current safe harbor because 20 months / 60 months (proposed law) is less than 20 months / 24 months (current law). Congress may also change the rules around unforeseen circumstances to make them stricter.
Thanks for the reply. Is there anything for unforeseen circumstances in the new tax bill? I can not see any news talking about it!
In my case staying 20 months out of 60 months for the course of last years in total will prorate the 250K accordingly? Meaning: if the gain is less than 250K x 20/60=83K, then there is no tax?
Andrew,
Do you know more about the unforeseen circumstances in the new tax bill? I can’t find anything online.
Thanks.
The currently published drafts do not seem to alter unforeseen circumstances, but the final reconciled bill has not been released yet.
It is too new at this moment but the bill just passed as of yesterday. Is there any change with the unforeseen circumstances? Like moving, job change, etc.
Hi,
I lived in a house for 6 years and then had to sell Aug 2015 due to a loss in income due to a messy two year divorce after my spouse walked away from the marriage. I then remarried. My current husband bought his small house in Nov 2012 and then married me (with two children) in 2015 and outgrew the house overnight. He could not have foreseen marrying someone with two children. We sold the small house in 2017 and moved into a larger house. He used the house as a primary residence for a total of 40 months but I only used it as a primary residence for 20 months before buying the new house. We were told by the closing agent that we had to pay taxes on the $336k made on my husband’s house because I didn’t live in the house for more than 2 years and I sold a house within two years of my husband’s house. We bought the new house before we sold the house we were living in by draining our savings. The money from the house sale replenished our savings accounts, so in a roundabout way the money from the sale of the house was used to buy our new house.
My question is, can we claim safe harbor due to unforeseen circumstances? My unforeseen loss of income and a divorce that forced me to sell my home, and then the unforeseen circumstance of my husband marring someone with 2 children and outgrowing the house he had already lived in for three years and needing to move. If so, how much tax will we owe?
Thank you for looking. No one can seem to give me an answer and your post is the closest to an answer I’ve come to!
While divorce generally DOES qualify for the safe harbor for unforeseen circumstances, I believe marriage generally does not qualify as an unforeseen circumstances, because you consciously choose to get married (and control the timing), whereas divorce is sometimes truly unforeseen for one of the parties.
As for whether your husband can claim a partial exclusion since he (as of now) qualifies while you do not, read the section of the article on special rules that apply to married couples. That answers your question pretty clearly.
https://hackyourwealth.com/avoid-capital-gains-taxes-selling-house-irs-rules-exceptions-exclusions#otherspecialrules
You should know that if Congress passes tax legislation currently being negotiated, it will disqualify your husband’s tax exclusion. That’s because the new legislation requires living in the house 5 out of 8 years, up from 2 out of 5 years. It retroactively dates back to the day the tax legislation was first introduced (couple weeks ago), so if you weren’t already in contract to sell by then, AND if Congress ultimately passes the legislation (TBD), you would be subject to the new rules immediately, not the old ones. Read more about the proposed tax changes here:
https://hackyourwealth.com/2018-federal-income-tax-brackets-retirement-contribution-limits
Hello and thanks for this useful article. Since alien non residents file separately, only, does this 500k tax exemption on capital gain apply to them?
Thanks
I’m not familiar with the rules for non-resident aliens specifically. Everyone can claim an exclusion if they qualify, but your question seems to be more about whether you’re limited to 250k vs. the full 500k that married filers get. I would think that if married non-resident aliens are required to file separately, then you can only claim 250k, but that’s intuition speaking, not fact. I suggest you contact a tax advisor.
Hi Andrew I hope you can help me whether I could get exempted from the tax. I bought a house in 2007 for $250,000 in WA thinking I be moving back unfortunately I can’t get a transfer due to my job. I ended renting it out till mid 2016. The rent is less than my mortgage. Mid 2016 the house was empty so I come back a few months to repair it. I than hired a real estate agent and now it is for sale. I plan to sell for $330,000. Although it looks like I will gain profit of $80k but I lost a lot since I have to put in some of my money towards the mortgage and repair. Will my stay for 8 months help to get some exclusion as a single person= 250,000x 8/24mths= $83,000.
Does that means my gain of $80k will not be tax?
Your response will be a great help. Thank you.
Hello Zai, I don’t think you would qualify for a tax exclusion in this case because you held the house for almost 10 years. Given the motivation was due to inability to transfer your job, there might be a way to make a case to the IRS for unforeseen circumstances, but I think the odds are low because you held the house for a decade. You might want to get a formal opinion from a tax accountant to be sure.
Hi,
I loved all this info, but i had quick question. I bought my condo in Oct 2015 and I plan to sell Nov 2017. Will i have to pay taxes? I lived in it as my primary residence, but i only lived there for 2 years. The gain is only 100K so taxes will take a huge dent. i am just tired of the neighbors and the stupid HOA.
thank you for your help,
John
Hi Andrew,
My wife and I purchased a house in Nov of 2014 and sold it in May of 2017; living there for over two years. We made a profit of about $80k from the sale. A tax specialist from H&R said that we don’t qualify for an exclusion because we’d have to own it for 5 years. Is this true? We sold the house because my wife quit her job because of stress at her work due to the threat of termination, and we wouldn’t be able to make the payments just on my income alone. I would appreciate if you could clarify this for me.
Vince, that is wrong. You do not have to own it for 5 years. You only have to live there 2 of the past 5 years while owning the property. So, in your case, since you lived there 2.5 years of the last 5 years while owning the property, you would qualify.
Great information. I have a question that I hope was not covered in the previous 150 Comments (I couldn’t get through all of them today).
My wife and I purchased a home in Virginia in March 2013 9for $285k), made improvements of around $30k and then moved to Tampa FL in September of 2014. The tenant died August 2017 and I moved in to start renovating the property and getting it ready for sale. It also helped that I do a lot of business in the DC/VA area so it was still convenient for me to spend my afternoons/evenings in VA while renovating. I did the math and if we sold the house in November 2017, we will have only owned it for four years nine months and would only have lived in it for 18 months (March 2013 to Sept 2014). Do we qualify for a partial exclusion or should I live there for six more months to satisfy the two year requirement. At which time we will have also owned it for five years. PS: the approximate profit/gain we are expecting is about $100k.
I forgot to mention that when we moved out in Sept 2014, we rented the house out until the tenants death in Aug 2017.
Nevermind I didn’t read carefully i got it now ☺
Hi, I purchased an apartment (House A) in 7/2010, got married in 10/2015, sold the house in 2017 for $100K gain. House A was never rented out. I lived there as my sole residence until marriage and some time thereafter.
My husband also bought his house (House B) prior to our marriage in 2010 and is looking to sell house B early next year 2018. This has been his main residence. There should be a gain upon the sale.
My name was the only name on the title for House A, his is the only name on House B.
Can we use the the $250M exclusion separately as if we were not married?
Can we take the capital gain separately in 2017 and 2018 tax filings if we file separately or jointly?
Once you’re married, there isn’t such a thing as filing “separately as if we were not married.” There is only married filing separately. Also, generally speaking, married filing separately is pretty disadvantageous from a tax perspective. As for the capital gains exclusion rules that apply when each spouse brings a prior owned home into the marriage, I recommend reading the blog post section above pertaining to married taxpayers.
Hi, Andrew!
I found your article about taxes and selling your home very useful.Here is my situation and I hope I can get a thorough answer.
Purchased my condo in California in 2002 lived there till 2004
Rented out from 2004 till June 2016 (last year)
Moved in since 07/16 till present but lost one of my PT jobs and financially can not afford to keep it. I had 2 part time jobs now I have only 1. Getting some Unemployment benefit as well and even combining the income I can not keep up with the high cost of living in the Bay area.
So if I sell my condo I can show I lived there 15 months or so (by the time it gets sold). Based on “Unforeseen Circumstances” and “Harbor protection” can I get a break and take advantage of no capital gain for 250K?
The second question: I have a 190K left on my Home Loan and also have a home equity line of credit which used 60K and need to pay it off at the time of the sale.
If I sell the condo for 600K, do they consider the 60K HELOC as part of the cost and will be deducted from the selling price? My estimated gain would be 600 -190 – 60 – (Commission and closing cost about 40K) = 310K ?
Which have to pay capital gain for the extra 60K only (310-250). Please confirm.
You may be able to claim unforeseen circumstances based on losing one of your jobs, but it won’t be the full 250k. Read examples above again to see how the math is calculated. I think your gain would probably exclude the HELOC.
I was living in my mothers home and working at a job there in her city of Ocala, FL. She was elderly and needed constant care. My husband was living in West Palm Beach, FL, 240 miles south. When my mother passed away, I could not get employment in West Palm Beach ( and I am the primary income earner in my family). So I kept my job in Ocala and purchased her home in April, 2016. However, I lost my job there in May, 2016 and began applying for a job in West Palm Beach with no success. Now I must apply for bankruptcy because my savings are about gone. If I sell my house here in Ocala, will I have to pay capital gains?
Please help.
LJM
Hi Andrew!
We bought our house in Maryland January 1, 2017. My wife got a job in New York starting October 30, 2017 and we have to sell our house as a result. I am guessing that our exclusion would be (10/24) * $500,000.
My bigger question is as follows. We are under contract to sell our house at the end of October / early November. If the sale officially closes before October 30th (before my wife starts working) is that going to be an issue since we will technically have sold the home before she started her job? Should we push to close November 1st so that she has officially started her job while we still own the home together?
Any help would be greatly greatly appreciated as I would hate to miss out on the exclusion because of one or 2 days difference.
Thanks!
I think closing in October should be OK as long as you can show the sale was motivated by the new job opportunity. What the IRS cares about is the motivation for the early sale; the actual date the sale closes (before or after the new job begins) is really more of a technicality – it doesn’t impact the motivation issue. That’s how I would present the case. As always, I recommend consulting a tax advisor for an “official” opinion.
Thanks Andrew! Guessing showing an offer letter that predated the sale of the home would be sufficient. Is there anything else that is typically required to show that the job was the motivation for the sale?
Hi Andrew-
I hope you are still answering to this excellent article. I have a special circumstance that I was hoping you could help us with.
My wife and I purchased a home for 153,000 in Sept. 2015, we bought a new home about 15 miles away in June 2017, selling our old home for a profit of $50,000.
The reason we purchased the new home is for my wife, a stay at home mom, begin a business in the studio space above the garage, which the previous home did not provide. We do not fulfill the 2 year residency requirement but I was wondering if somehow this could be considered an unforeseen circumstance or employment related move?
Probably not. But you can check with a tax advisor / real estate accountant for a formal opinion.
Hi Andrew,
In 1981, my spouse and I, bought a house for $17000. My spouse died in 8/2000 and a year later I refinanced the house and deleted her from the loan. I lived in the house until 2004 because I remarried, I then rented the house to my daughter. Then in 6/2006, my spouse and I moved back in the house & we lived there until we bought a new home for us in 12/2009 for $200,000. My daughter continued to rent the house. My spouse and I then sold the house that we purchased in 2009 ; we sold it on 12/2015 for $375,000 & it was our primary residence. On 5/2016, I decided to sell my old house & on 7/2016, I sold it for $480,000. Do I have to pay capital gain taxes? I’m retired and my income combined with my spouse is $37,000. I was told that I don’t pay taxes because I’m 66yrs old. Is it true?
Phil
Love this thread. My wife and i bought a house in iowa for 45k and i rent in illinois because i work there. She does not recieve an income . If she lives in the house for two years ( i can only come home on weekends) and we decide to sell and is able to sell the home for 100k. Can we file “married but seperatly” and just use her 125k exemption?
I’m not sure why you would need to file married separately. Your filing status doesn’t impact whether you can exclude the gain. You can still file married joint even if she’s the only one allowed to claim an exclusion. Your exclusion sounds like it will be subject to the post-2009 limitations, but your wife should be able to exclude a little bit of gain if she lives there for 2 years. Sounds like your total gain anyway will be ~$55k, which is lower than the $250k cap.
I bought a house in 2013, got married in 2015, bought another house in 2016 and moved to new house and rented the first house. In 2017, I was planning to sell the first house. Obviously, I qualified for tax break up to $250k. But since my wife live in that house for about a year, I wasn’t sure if she qualifies for partial benefit. Most of the examples that I’ve found online indicates, the spouse qualifies partial benefit IF she is relocating for a good reason. But only reason we have is we got married in 2015, and moved out in 2016.
Simply to put, I qualify, but my wife doesn’t since she lived there for one year after we got married. Can she still qualify for partial benefit? Is marriage considered as unforseen circumstance or there has to be other reason that follows, such as change of job or family got bigger or etc.
I’m getting too many different answers, even from different CPAs.
Hey James, this is one of the more confusing areas of “unforeseen circumstances.”
1. The rule is: Anything specifically (under the section on unforeseen circumstances) listed in one of the bullet points in the above article as an unforeseen circumstance qualifies. This does not include marriage.
2. Anything NOT on that list does NOT get safe harbor protection. Doesn’t mean it’s barred, just means that qualifying for the exclusion is case by case, and depends on the facts and circumstances. The IRS has previously indicated that adding dependents due to marriage generally qualifies. See: http://www.journalofaccountancy.com/issues/2009/nov/20091783.html
3. The question here is whether marriage alone qualifies (separate and apart from adding dependents). My own view is that it does not. First, marriage is so common, and your scenario is so ordinary, that if it did qualify as an unforeseen circumstance, I believe strongly the IRS would have already issued guidance addressing the same, either through explanatory letters or comments on regulations, clarifying / blessing marriage as a tax-qualifying unforeseen circumstance. Second, when you think about it, marriage just doesn’t seem like an unforeseen circumstance logically. Unlike divorce or having kids (where you don’t entirely control whether or when the event happens), marriage is pretty much entirely controlled by you + spouse. You literally decide whether to get married, and then you literally decide your wedding date. It seems hard to argue to the IRS that either decision is an unforeseen circumstance, which is probably why the IRS hasn’t published guidance that it is.
But that is my personal view, and I am not a CPA. I am a lawyer (but this is not legal advice and I am not representing you here) and a financial analyst/planner. I think the best you can do is to work with a CPA you trust, make a call on whether you will attempt to claim the exclusion based on marriage, and be ready to justify or pay back the exclusion if you get audited.
Andrew,
I bought my home in 1989 and lived there for 12 years. I rented it in 2000 and it’s been rented since. I wanted to move back in for 2-3 years and then sell it. Will I be able to use the cap gain exclusion when I sell?
Thank you!
If you move back in 2-3 years you’ll be able to claim a partial, not complete, exclusion because you rented it out for so long. See article above for details re: changes to the law in 2009.
Hey Andrew, this was so helpful. Thank you.
I’ve got a quick question, if you have the time.
– Bought my condo Oct. 2012. Used as primary residence through 2013.
– Rented it 2014 – 2016
– Moved back in Jan 1, 2017.
I was told when I get to Oct 2017 (my five year mark) Id only be exempt from 2/5 Capitol gains (due to renting it for 3/5 of the time).
To your knowledge, is that true?
Thanks!
Your answer is what I wrote in the post above. 🙂 Check out the section on changes to the law after 2009.
Hi Andrew! Thank you for all the helpful information. Hope you can help answer these questions!
I’m shared owner of an 85 acre piece of land with my mother & brother in TN. My family home is on this property which they still live in. I moved to FL. 30 years ago for a job & own a FL. home with my husband. If we sell the Tn. property how will the capital gains tax work for each of us (myself, mom, brother)? We would be using the sale of this property to help purchase new homes for each of us.
Could you please address the ramifications for a surviving spouse if a home is sold within 2 years following the death and if a home is sold within 3 years following the death of a spouse. I fully meet the residency requirements.
Thank you for all the terrific information in your article !
The rules for within 2 years vs. within 3 years differ. There is a way to get the full 500k if you sell within 2 years, but not if you sell within 3 years. However, even if you miss the 2 year cutoff, you may still be able to step up the basis of the property by half the gain, tax-free, if you inherited your spouse’s half at the time of your spouse’s death. And then you can claim 250k exclusion on the other half. Here are some articles that may shed more light on this scenario for you.
http://www.inman.com/2013/03/19/qualifying-home-sale-tax-break-after-spouse-dies
http://www.kiplinger.com/article/real-estate/T010-C001-S001-selling-a-home-after-a-spouse-s-death.html
https://www.washingtonpost.com/news/where-we-live/wp/2016/06/27/selling-a-home-can-be-tricky-after-a-spouse-dies-heres-how-to-do-it
I bought a property in March of 2009. Lived in it from May of 2009 until Dec. 2013
Rented from Jan 2014 until May 2017
I’ve only lived in the property 20 of the last 60 months, just shy of the 24 months required. We moved because my partner got a job transfer in another state, but I had a friend that wanted to rent it so that was easier for me than selling from another state. Can I claim a partial exemption for this? If I moved back into the property for 4 months would that satisfy the primary residence requirements or would I need to be there longer than that considering that I start “losing” time that I lived in the property as we move farther into 2017.
You can probably claim a partial exemption if you moved due to a job transfer. The rules for this are described in detail above. Your partner has to be a legal domestic partner though – not just a significant other. If you move back, you do start losing time, but all that matters is that you cumulatively have 24 months accrued living there as your primary residence over the past 5 years. If your gain is low enough, you may not even need to do that, though, bc the job change exception let’s you capture a fraction of the capital gain exclusion, but the amount the fraction is applied to is the max 250k/500k regardless of what the actual gain on the sale is. (This rule is described above.)
Thanks for the quick reply Andrew! I tried talking to a CPA about the issue but they weren’t all that helpful, in fact he told me there is no partial exclusion for capitol gains, even if I did claim safe harbor. My partner and I are not legally married or otherwise, but we did live together in the property before the move, so I thought maybe that would work. I have a lot of equity in the property, so I could be looking at a pretty big capitol gains hit.
It is not correct that there is no partial exclusion for a job change safe harbor: I linked to the applicable IRS regulations in the article above describing how the partial exclusion for safe harbor works. Incidentally, I do not recommend talking to any CPA – I’d talk to a CPA who focuses on real estate specifically and has an actual real estate practice, ideally a CPA who is herself a real estate investor. It’s a specialized area of tax and not all CPAs really know the rules. However, what makes your situation not work is the fact that you have no legal relationship with your partner and it was your partner’s job, not your own, that changed. So you cannot personally claim a job change safe harbor, which means you cannot get a partial exclusion based on it. If the CPA was referring to this fact, she was correct.
Hmm. The IRS doesn’t say it has to be a legal owner or legal spouse, though?
“Work-related move. You meet the standard requirements if any of the following happened during the time you owned and lived in the home you sold:
You took or were transferred to a new job in a work location at least 50 miles farther from home than your old work location.
You had no previous work location and you began a new job at least 50 miles from home.
Either of the above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.”
It’s a tough call for me because I’m probably not going to sell if I can’t get the partial exemption because I really don’t want to be hit with 30k in capital gains tax. The CPA I talked to was apparently supposed to be familiar with real estate law, but clearly wasn’t. I’m having a tough time finding anyone that knows anything about these things.
Hmm. Interesting. You *might* be able to make an argument that your partner qualifies, then, given the express language of the regulation. A CPA is gonna best be able to help you frame up your options here. I do have an acquaintance who specializes their entire CPA practice on real estate. If you like, I can refer you to them. Email me if you’re interested and I’d be happy to bridge an intro. (My email is near the bottom of my About page description, and also the contact link at the very bottom of this site.)
Btw, where is the house located?
Here is my situation: Bought house in LA County, CA with my parents in 1987, deed says my parents own 2/3 as undivided interest as joint tenants with right of survivorship and I own 1/3 as their tenant in common without right of survivorship. I have been the only one living there since purchase. My parents helped with mortgage payments until approx 10 years ago, when I assumed paying for everything (mortgage, taxes, etc) 100% on my own. I moved out in 8/15 to take a job in another state. I moved back to CA in 4/16, but not to my house — I moved in with my fiance. My house has never been rented — it still has my furniture in it and never had a tenant.
I will move back in Dec 2017 to prepare the house for sale and anticipate selling by mid-2018 (let’s assume no later than 6/18). My parents have been bugging me for years and just want to quit claim the house to me, but I have resisted, as I think there may be dire tax consequences.
If I sell in 6/18, with them still on title, but intending to give me all the profit, what are the tax liabilities for us? Is is better for them to quit claim to me, just before the sale? They have been retired for over 15 years and have no earned income. I am planning to quit my job in 1/18, so that I can concentrate on readying the house for sale and will not go back to work at all until 2019. So does that mean that we are all exempt from capital gains anyway (assuming laws don’t change regarding owing 0% capital gains if income is below $39,000 for a single person, etc.)
My parents are willing to either quit claim to me or just give me all the proceeds after the sale, which ever way makes the most tax sense. And they can gift me up to $5 million tax free anyway, right?
Thank you in advance for any help you can provide.
I purchased a property in March of 2009. Lived in it from May of 2009 until Dec. 2013
Rented from Jan 2014 until May 2017
When I calculate out the 2 of the last 5 years I’m right at 20 months owner occupied out of 60, just shy of 24 months. Can I take a partial exclusion for this? We moved because my partner got a job transfer to another state. I didn’t sell at the time because I had a friend that wanted to rent it and that was easier for me. If i moved back in for 4 months would that satisfy the 24 months or would I need to be there longer since that “removes” some of the time I lived there before I rented it?
After going through this blog, you will be eligible for partial exclusion. I am also on the same boat as yours.
Here is the post from IRS’ official website. No need to go to CPA 🙂
https://www.irs.gov/publications/p523/ar02.html
Isn’t capital gain = Selling Price – Price at which you bought the home.
I don’t think it is related to equity. Plz correct me if i am wrong.
I’m in a very similar boat to you. Were you able to take the exclusion? I really want to know for my upcoming taxes.
I’m in a similar boat as you. Were you able to take the partial exclusion? I’m really interested to know for my upcoming taxes. Thank you.
Hi andrew.
thanks so much for the great info! so appreciated!
I have a quick question: I have been self-employed my entire career (35 years until 2016). My CPA took a home office exclusion for my business, which i believe included depreciation of my home.
How is all this calculated when i go to sell my primary residence that we have lived full time in since 1980? The home was purchased for $120,000, and we have put $400,000 in improvements since purchase. The Home can now sell for $1.5Million. Thanks so much for your assistance!
Warm regards,
Elyse
Hey Elyse, you should probably consult your CPA on how to calculate your particular situation since it depends on the details (and that’s what they’re for!). But to give you a general idea, you might check out these 2 articles:
http://www.nolo.com/legal-encyclopedia/taxes-when-you-sell-house-containing-home-office.html
https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/sale-or-trade-of-business-depreciation-rentals/depreciation-recapture/depreciation-recapture-3
thanks so much Andrew!
Thank you for this article. Sanity check- we have owned a home/resided in Illinois since 1992. I became a RIF(unemployed from 12/2013 to 9/2014) and took a job on the east coast 9/2014. My husband remained in residence at our Illinois home until ~ 3/2015. We rented the Illinois house 5/11/16 to 5/15/17, and will close on our house 5/19/17 in IL. We bought a new house in 4/2015 which became our primary residence.
It appears we would fall under the exclusion for paying capital gains, is this correct?
On these facts, it seems like it – just barely. Probably still a good idea to double check with your tax advisor if you want to be sure.
I purchased my condo in 2008. I became disabled in 2013 and now need to move out of state to be closer to family due to my disability. I anticipate the proceeds of the sale to be less than $100,000. Is this amount taxable? Also, I read somewhere that the proceeds need to be used towards the purchase of another home within 3 months in order to be excluded as income. Another question unrelated: I have an IRA account which I may need to access from time to time. How will this affect my disability income?
Your assistance would be very much appreciated. Thank you.
It won’t be taxable if you qualify for the tax exclusion. If you qualify, you don’t have to use the proceeds to buy another home. Re: your IRA account and disability income, suggest you to consult a tax advisor.
I heard if you are 57 years old and over you can get an exclusion up to $125000. Is that true?
Not anymore. Now the applicable law is what I wrote about in this post.
Hi,
We purchased a home in July of 2009 and we are finally able to sell it now, in May of 2016. We reluctantly rented it out in July of 2011, when we moved across the country for a job. We have claimed losses on it every year since 2011. A total depreciation of around $30,000, I think. Would we pay capital gains on the sale now? Or does the safe harbor exclusion apply to us? This is our only house, as we could not afford to buy another without the sale of this one. Thanks.
I don’t think you can claim any tax exclusion. The employment safe harbor doesn’t apply because you didn’t live in the property in the last 5 years. You might be able to claim some final year losses against the 2016 gain, though.
Your article is great! But I still can’t seem to find an answer to my question. 8 years ago my in-laws purchased a home for me and my husband due to a short sale my husband had. The down payment, closing costs, monthly payment, and all improvements to the home were paid by my husband and I. The mortgage and deed were in my in-laws name until October 2016. In October 2016 my husband and I were able to “refinance” the home. We did not “purchase”the home because the lender said we have vested interest in the home. We went through the escrow process and transferred Title from my in-laws name into our name and the mortgage into our name. We are trying to sell our home to move into a larger home and we will have a large profit from the sale. Will we have to pay capitol gains on the sale because we did not own the home per the deed?
Huh. I’m not sure about this one. You’ve got a situation where someone else legally owned the home but you essentially “constructively” owned the home, made all the payments, etc. My lawyer brain thinks you will not have to pay capital gains tax on the sale, but your in laws will (since they did not satisfy the residency requirement, hence cannot claim capital gain tax exclusion); but then, when they remit the funds back to you and your husband, it will be treated as ORDINARY income by the IRS, not capital gains, and hence will be subject to ordinary taxes (higher than capital gains taxes). This is because, in the eyes of the IRS, your in laws essentially paid you a lump sum, say, for all your years of service looking after and caring for the property. But that’s just my instinct, NOT a legal opinion. If there is a creative way around this dilemma, a good real estate tax lawyer would be the best bet to figure this out, hence I’d recommend consulting with one to get formal legal advice.
I did not meet the 2 of 5 year requirement… I lived in property for 3 years years. Rented after that and had renter move out exactly at 3 years but did not sale for 2 months. Can I pro-rate capital gain based on non-qualfied and qualified use over Iength of ownership?
No.
Hello,
I have rented to own a house from my dad for 31 years. I made all house payments, maintenance and taxes and home owners insurance plus paid off the home nine years ago. I would like my dad to sign house over to me but worried i will have to pay capital gains when i go to sell. Is it true if i have lived in the home after he signs it over I dont have to pay capital gains if I sell? Thank you!
It depends on when title was transferred to your name (which is the official date you start owning the property), how long you live in the property after that date (you have to live 2 / 5 years), and how much capital gains there are after you sell. Even if you qualify, you can only exclude $250k as an individual and have to pay any tax above that amount of gain.
Hi,
I bought the house in December , 2000 and live there as primary resident until October 2011. I rent it out in 2012 ans sold it on January 2016. So live in this house as primary resident for more than ten years. So I have to p at all tax all gain value of $100K ? Thank you
Hi Andrew,
Thank you so much for your article “How to avoid capital gains taxes when selling your house”. This is very helpful but I am still confused about the Jan.1, 2009 new rule.
We bought our first home in June 1993 and lived there till July 2010. We moved and rented the house for the last 7 years. We are planning to move back in August 2017 and make it our primary residence for 2 years before selling it.
Can you help me to understand this part?
Quote: First, the IRS says the term “period of nonqualified use” means any period starting January 1, 2009, when the home is not used as a primary residence of the taxpayer or taxpayer’s spouse.
So, anything before 2009 still counts under the old law. The new restrictions only apply starting January 1, 2009.
That means if you bought your home before 2009 and sold it during or after 2009, then you’ll use the old law to determine your tax liability for the part before 2009, and then use the amended law to determine your tax liability for the period afterward.
Thanks, Jas
Which part are you confused by? For the period after 1/1/2009, you’ll have to prorate according to how much time you rented the house out vs. how much time you lived there. Since you rented it out for a period after 1/1/2009, you’ll only be able to exclude part of the gain from taxes.
Hi Andrew
I bought my house in November 2003 and lived in it through 2010. I went to Australia to be near daughter in 2011 and have been Australia for the past 6 years. I got the house ready to put on the market in 2015 when I thought I could sell for the purchase price at least and sold the house in 2016.
For the years 2011 -2015 I rented the house to help cover cost of holding on to the house. I didn’t profit from the rental and supplemented cost of mortgage etc with money from my savings account.
For 2016 taxes, where do I stand in regard to capital gains please?
Thanks
It doesn’t seem like you can claim a tax exclusion unfortunately. First, if you didn’t sell for a gain (i.e. didn’t get your original purchase price back), then there wouldn’t be a capital gain to claim at all. Even if you did sell above your original purchase price, it looks like you won’t qualify because you haven’t lived there for 2 of the last 5 years. You might be able to offset some of the gain with direct expenses you incurred in selling the house, or that you occurred during the year of the sale, but that’s probably all.
Separately, you do have to file a return every year, even if you live abroad, but you can claim the Foreign Earned Income Exclusion to avoid taxes on the first $101,300 of earned income for the 2016 tax year. Turbotax should be able to guide you with its simple questionnaire – it doesn’t require you to know any IRS rules yourself, and if your return is not complicated, it should only take you 1-2 hours at most.
Thank Andrew
Regarding my 2016 US taxes, It looks like the capital gains tax on 17k AU, the difference between what I bought for and what I sold for, is about 3,500 (I used an IRS calculator). That is a lot to pay, considering I’ve spent a lot of my own money to pay the mortgage and property tax when the house was rented (5 years or so) and vacant (about 1 year) and then to get the house ready for the market, I mean I’m talking maybe 20k. By brain is reeling.
Just to clarify your comments to another participant, when I file my 2012, 2013, 2014, and 2015 taxes I should depreciate all rental expenses because the IRS will assume I’ve done so, correct?
Also, I can calculate expenses of getting the house on the market and those will be subtracted from the tax on the 17k? I’m wondering if keeping the house vacant while it was being made ready for selling can be considered, that’s about 10 months worth of not getting any rent. Thoughts?
Thanks again.
Judy
You should take depreciation on the property because the IRS will assume you’ve done so: the IRS will tax you 25% on any depreciation recapture.
And yes, you can subtract expenses you incurred in preparing the house for sale, such as advertising, appraisal, attorney fees, closing costs, escrow, mortgage related fees, real estate agent commissions, recording and settlement fees, etc. Those expenses will offset the capital gain itself, not the tax. So your tax savings on that would be the tax rate multiplied by those expenses.
I don’t think you can count theoretical costs like lost rent, see this Intuit forum post: https://ttlc.intuit.com/questions/2302155-rental-expenses-while-vacant-and-listed-for-sale-and-or-rent-which-ever-came-first-and-then-rented
It may be worth consulting a tax advisor to get an official opinion on this, but that’s my 2 cents.
Andrew,
Thank you so much for your prompt reply.
I did look at the previous comment regarding a vacant rental property, thank you, and will consult an expat tax professional.
One last question: Would you say that improvements like landscaping and painting (interior), and bathroom plumbing repairs undertaken to prepare the house for the market, and to meet the appraisers demands (the plumbing, electrical work, and building and garage repairs) be considered ‘expenses’ I could use to offset the capital gains tax figure?
Thanks again for your help. I may use turbo-tax for the earlier tax filings, i.e. 2012 through 2015, but I’ll use a professional or professional tax service for 2016, the capital gain year 🙂
Thanks again! You provide a great service. I’ll bet you’ve been especially busy these last few days!
JudyD
“Would you say that improvements…I could use to offset the capital gains tax figure?” – I think so, there’s certainly a legit case you can make for deducting such expenses (i.e. you would not have incurred them but for selling your house). But definitely recommend getting the opinion of a tax professional on this, as I have not yet gone through the process of selling real estate – only buying. 🙂
Hi Andrew great article I need to add more information to my first inquiry, we purchased the second home due to my husband’s change of job and had to commute more than 50 miles. so we rented our 1st home and bough the second home to be closer to his work after 2.5 years living in the second home we had to move again to the first home and rented the second home due to job change again commute more than 50 miles. 2nd home purchased in 2008 lived in it until mid 2010. the 2nd home stayed rented through June 2016. July 2016 we put it up for sale and no renters anymore. took a while to find a buyer but now it’s in escrow. Do we qualify for the old rule since we bought the 2nd house before 2009? Appreciate your help
If you read the post above, the part that applies to you is this:
“That means if you bought your home before 2009 and sold it during or after 2009, then you’ll use the old law to determine your tax liability for the part before 2009, and then use the amended law to determine your tax liability for the period afterward.”
So, any period after 1/1/2009 where you rented it out will not benefit from the tax exclusion. It doesn’t matter that you bought the house before 2009. In this case, since the property has not been your primary residence for any of the last 5 years, you would not be able to claim any part of the tax exclusion, unfortunately. The fact that the new job is >50 miles away doesn’t apply in this case because the absence was so long (~7 years).
My Husband and I bought a house in April of 2008 and lived in it until May of 2010 then rented the house from June 2010 to June 2016. The house was put up for sale July 2016 and just last week March 2017 is in Escrow sale not complete yet. Question is do we qualify for the old rule before the 2009 new rule?
Andrew, thanks for the awesome article. What if I use the home as my secondary residence with no rental income. Would the capital gains tax still apply since I don’t meet the residential requirements?
Thanks, Greg
Yes
I bought a condo in an small town due to a new job there.
6 months later I lost the job and spent several months on unemployment.
Due to being a small town I could not find a new job in my field of work so decided to sell the condo within 2 years.
How do I proceed in using turbotax to work on this?
Thanks
TurboTax will automatically ask you about the sale. The software has a section on home sales that it automatically asks you about. You can get TurboTax here: http://hackyourwealth.com/TurboTax
I bought my prior house (House A) in 12/03 and lived in it until 5/15, when I moved in with my fiancee. Sold it on 9/15 prior to my marriage (capital gain of about 70k on the sale) in 11/15 and paid no taxes on the gain when I filed jointly for 2015 because it obviously qualified for the exemption. The house was only ever paid for by me, and I sold it while still unmarried.
We bought a new house (House C) in 12/15 while we worked to sell her house. Her house (House B) sold 6/16, so we were living in the new house for roughly 6 months. Now here’s the tricky part. She purchased the house at the end of 6/14, so it was owned for just under two years (about 23 months) and lived in for about 1 1/2 years (17-18 months).
I claimed House A for 2015. I owned and sold House A while unmarried. I am thinking, therefore, that the exclusion would only apply to me, regardless of whether or not I filed jointly.
House B was sold after we married. I never made any payments on the house since I was paying the mortgage on House A prior to marriage and then House C once we were married.
Assume here for the sake of argument that I can claim an unforeseen circumstance due to marriage and the expansion of family through addition of stepchildren (see PLR-152828-06). The larger issue for me is whether I can avoid paying taxes on the 60k gain from the sale of House B. My thinking here is the gain from House A applied to me only and that she is still eligible for 71-75% of the 250k exemption based on how long she lived in the house, which would cover the 60k gain.
Here’s my opinion:
You’re right about House C – since you satisfied all the criteria, you get the exclusion.
If you want to assume for the sake of argument that you can claim an unforeseen circumstance due to marriage and the expansion of family, then by that assumption you should be able to qualify for the full exclusion for House B, since you said 71-75% of the exemption exceeds the 60k gain on sale.
If you are wrong about that, however, you will most likely be jointly liable as a couple for any tax liability for House B.
That’s because the IRS evaluates your tax filing status as of the last day of the year, 2015, and in this case your tax filing status was married-joint on that day. All the IRS cares about is you paying your tax liability: so if you have no tax liability on House A or B, the IRS doesn’t care how you divide up the proceeds of any excludable gain, which in your case for House A can accrue 100% to you and not your wife, and similarly for House B 100% to her and not you. That’s private matter re: how you divide up the gain (although state laws may govern issues around community property, but based on your facts each house would almost certainly be independently attributable to each of you, not joint).
If the IRS disagrees with your claim for an unforeseen circumstance, however, then it will demand payment for tax liability. It will look at your 2016 return (the year of sale for House B) and see that you are married filing joint, and then it will attach the tax liability on both of you jointly. To be sure, you can work out a private arrangement with your wife where she pays for the tax liability for House B from her own private funds, not marital funds, but the IRS won’t absolve you from the tax liability until the tax is paid (the IRS doesn’t care where the funds come from, but it can come after you both if the tax isn’t paid). If you made such a private arrangement with your wife, you can use TurboTax or similar tool to calculate the diff between your 2016 tax liability both with vs. without the gain on House B to determine the tax delta between the two.
I have a question. We sold our home….bought some land build a shop and we are living in that shop while we are building are permanent residence on the land we own *where the shop is*…we moved in 9/2016 and the house will be completed 6/1/2017…do we have to wait the 2 year to sell 9/2018 or 6/2019 when we actually move into the permanent residence new construction house?
Does anyone have the answer to this? Our house was paid in full. We sold the house. Bought some land moved on the property on 9/1/2016…in a temp shop we built…(we are building a new home next to the shop)….we are moving in the shop on 6/1/2017….when can we sell and avoid the capital gain tax…when we physically move in the permanent house? which would be 6/1;/2019……or when we moved on the property in the temp shop 9/1/2016 (next to the new construction house which is our permanent house). 2 years from that date would be 9/1/2018. Thanks for any help. I
If you’re trying to sell the house, I’m pretty sure the clock won’t start until you actually move into the newly constructed house. You’ll have a hard time claiming a 2-year based exclusion for a house that was only built 15 months prior.
They also would not have owned the property for 5 years.
If you live in a cardboard box on a piece of real property, this is your primary residence. Yes, your shop is your residence. The clock starts when you moved in your shop, assuming you will sell complete parcel including shop and home.
Hi, thanks for putting this article together. I’m in the process of selling my home and my situation is similar to “Example #3: Let’s add some spice…” above in that I moved for a job relocation and rented my property out for the last year prior to selling. Based on the scenario you laid out, I qualify for the full tax exclusion (3+ years primary residence, 2-year period that I rented the place out does not count as non-qualified use).
I’ve been asked to fill out a form 1099-S and a certification form. The certification form acts as a seller assurance on primary residence, sale price, and etc. It looks to me that if you answer true to all the questions, you are considered exempt and fall under the full tax exclusion. That said, one of the questions asks if “I have not used any portion of the residence for business or rental purposes after May 6, 1997”. Based on the fact that I rented the property out for an intermittent period, I will have to answer False to this question. Are you familiar with this certification and would you know if this by any way impacts my ability to claim the full tax exclusion?
Good question. The May 6, 1997 question is relevant to the tax exclusion, but only for depreciation purposes. If a taxpayer uses a home for purposes other than as a principal residence – i.e. partial home office deduction or rented out the property – then the gain exclusion does not apply to the extent of depreciation allowed on the home after May 6, 1997.
There is a good Journal of Accountancy article on this point: http://www.journalofaccountancy.com/issues/2002/oct/thehomesalegainexclusion.html
An excerpt in the article says:
If a taxpayer uses a home partially for business purposes, only the part of the gain attributable to the residential portion of the home is excluded from income. Also, the gain exclusion does not apply to the extent depreciation allowable after May 6, 1997, with respect to the home, exceeds the gain on the home allocable to the business-use portion. Therefore, pre-May 7, 1997 depreciation does not reduce the amount of gain excludable under section 121 on the residential portion in any circumstances. However, post-May 6, 1997 depreciation allowable on nonresidential use can trigger gain recognition on the residential-use part of the house.
There are also some good hypothetical examples there in the article to guide you.
Lastly, you can see how the May 6, 1997 question comes into play on the IRS’s worksheet for “How To Figure Your Taxable Gain or Loss” here:
https://www.irs.gov/publications/p523/ar02.html
We bought a house in 2001, lived in it until July31st 2016. Renters moved in August 1, 2016. We bought another house and moved to another state. We are now selling the house, but it like wont sell and close before the end of August. We are married and file jointly. Will being over the five year mark slightly prevent us from taking advantage of the exclusion? Renters are out of the house, should I move back into the house? By going over I am afraid we will lose a lot of money. I hope tis makes sense. What should we do?
Thanks,
AP
Does the money come out at escrow or are you responsible for it at tax time. Do you get a choice?
The tax? You report it when you file your taxes. Your agent or title company or mortgage company may issue you a 1099-S (Proceeds from Real Estate Transactions).
So, I my husband and I are relocating for work to a new town over 50 miles away. We currently own a home in the town we live in and are buying a home in the town we are moving to. Since homes go so fast in the town we are moving to, we don’t want to wait to sell our current home m, which could take a few months. Is there anyway to avoid paying capital gains once we sell our current home, since by that time we will own two homes? We have lived in the current home for 4.5 years.
If you’ve lived in your current home for 4.5 years, you get the tax exclusion. It doesn’t matter that you buy a new home first. It doesn’t matter that you’re moving 50 miles away for work. It doesn’t matter that you haven’t owned the current house for more than 5 years. The only thing the 50 mile work rule does is shield you in some cases when you don’t otherwise meet the 2 year residence requirement. The only thing buying a new home first, before selling your old home, does is prevent you from deferring any taxable gain (>$500k) by carrying it over to your new home. So, unless you’re current home yields more than $500k capital GAIN, buying a new home first doesn’t make any difference.
My mother and aunt brought a house together in 1984. My mother has lived there since that time while my aunt lives in another state. Will my mother qualify for capital gains tax exemption? The house is being sold due to my mother’s deteriorating health so she can live with me.
Seems like she would. But read the article above to understand how the rules work.
Hi, this is a great site. We have a somewhat tricky scenario that we need help with. We purchased a house 11/2001 for $92,500. We made extensive renovations ($35K+) and lived in it until 7/2007 when we had to move due to job loss/transfer (> 50 miles). Put the house up for sale but it was during the mortgage bust so it sat on the market for a year before we decided to put it up for rent. We rented it 10/2008 until 2/2016 and then put it up for sale. House then sold for $188k after putting in an additional $15k in renovations in 9/2016. Is there a timeline restriction to the safe harbor exception of having to move due to job change/loss? We waited as long as we did to sell in order for the market to recover. Thanks in advance!
2 years. Doesn’t seem like you’ll qualify for the exclusion.
Joan and Sue (sisters) bought a house together, They moved in June 1, 2016. It wasn’t long before they were fighting day in and day out. They decide they need to sell the house because they can’t live together. The house sells April 1, 2017. They make a total of 90,000.00 over purchase price. are they eligible for unforeseen circumstance.
Probably not, because the sisters would likely be deemed to have assumed the risk (they were sisters after all, not strangers). But a tax advisor could give you a more formal opinion.
could this not be handled like a divorce?
Chris and Leslie own separate homes (paying mortgages) .
They get married- now they have 2 separate residences.
Chris wants to sell his house then use the proceeds to pay down Leslie’s mortgage, instead of buying a new different home as primary residence.
Will they as a couple still owe capital gains?
The marriage has nothing to do with capital gains because you owned your home prior to marriage, so any tax consequences would affect you alone. Moreover, whether you use the proceeds to pay another’s debt or buy a new home has no relevance to whether you owe cap gains upon the sale of your current home. I have no idea if you will owe cap gains based on your facts.
Thanks so much for this info but I am still wondering about my situation but pretty sure I am good.
Closed on a new house down the street while my old house was just starting escow. I moved into the new house a few weeks later but due to a few issues the closing of my old house kept getting delayed.
Can I claim my primary residence at my new house from the day I closed on it or do I have to wait unitl my ild house closed?
I am trying to sell current house as quickly as I can move out of state. Thank you
You can choose either, but you can only claim one primary residence, so if you claim your new house the day you closed, then you have to make sure you still satisfy the 2 year requirement on your old house because you now have non-residence period at the tail end. By contrast, if you wait until your old house closes, then you cannot claim primary residence on the new house until then.
Very informative and thorough article.
I am not clear on the non-qualified use as it pertains to me.
1. Bought a house on 12/01/2013 and moved into it as primary residence
2. Lived there till 06/30/2015 (approx 19 months) and had to move due to work reasons (>1000 miles)
3. Listed the house for sale and for rent. Got an offer for sale. The sale deal fell through as the seller did not qualify for his VA loan. House was tied up for over a month on this.
4. Instead of waiting around for a buyer, decided to rent the house as I did not get additional sale offers. House has been rented for over 18 months now.
5. If I decide to sell the house in a few months, do I qualify for the (24-19)/24 = 5/24 * $500K exemption? (Married Filing Joint).
You could probably qualify for a partial exclusion of 19/24 * 500k, but consult a tax accountant for a formal opinion. The thing that might cut against is the fact that you did not sell for 18 months (when theoretically you could have just lowered the price to attract more offers).
Any update on this case? Can we get partial exclusion
This is an informative and thorough explanation of the capital gains tax process – thank you for posting it. My husband (US citizen) bought his house in 1998 and lived there until 2008. He married me (a UK citizen) and that necessitated a move to the UK as I had a young son and supported my mother. Since then the house has been rented out to cover the mortgage payments. My husband is now selling the house. I know he does not qualify for the full exemption but wondered if marriage to an overseas spouse who could not relocate due to family responsibilities would qualify for a partial exemption?
You should probably get a tax advisor’s opinion, but my guess is it will not qualify for the “unforeseen circumstances” exception. That exception tends to favor situations where the taxpayer literally has no choice in the matter: e.g., natural disaster, job loss, death, divorce. I think selling the house 8 years after the fact, rather than soon after moving to the UK, also cuts against the tax exemption.
Thank you for your swift and thorough reply. I thought that may be the case but we’ll talk to our tax advisor and see if he can suggest anything.
We bought a 1884 carriage house in 1980 in its original barn state for $106,000.
We lived there while renovations with heating and plumbing took place.(cost $250,000)
After completion Hurricane Bob destroyed the house.($300,000 damage -insurance about $86,000-does this come into play?)
Now it had to be remodeled due to water etc damage at the cost of another $250,000.
We just sold house for $1,2995.000 due to not being able to do the stairs anymore.
I know we will get the $500,000 deduction .How will I figure the basis amount to claim ?
Do we get both remodels?(we do have a tax accountantt but want to know your opinion.
ThanksJoan
Joan, I believe you CAN add the restorative repairs (but not insurance payout) to your original basis but the details matter, so you should consult your tax advisor for a formal opinion.
My question was can I deduct both restorations?Thanks
I would think so, but your tax advisor would know for sure – I think the specific facts of your situation / remodel / cause of damage will matter to the determination.
Hi, again,
“not considered qualified use, either; it’s just not nonqualified use??
Now, I’m confused.
Help!!
Hey Bruce, yeah you should be able to qualify for the full $250K since you lived there 2 of the last 5 years and your rental period was the very last segment.
When I said it’s “not considered qualified use, either” – that just means you didn’t LIVE there, which is the only use of the property that is technically considered qualified use. And it’s “not nonqualified use” because of that “last in time” exception that says the very last segment won’t disqualify you from the $250K.
So, you’re good. Hope you’re not confused anymore!
Thanks, Andrew!
Hi Andrew,
Tenants are moving out 7/1 and putting property on the market. Should sell fast (hot market in CA). Any changes to tax code for 2017 that would effect my qualifying $250K exemption? If so, great! Though I still will be taxed 25% on amount of “recapture of depreciation”, right?
Hi Andrew,
Tenants are moving out 7/1 and putting on the market. Should sell fast (CA market). Any changes to tax code for 2017 in regards to $250K exemption? If so, great! Though I still need to pay 25% tax on amount of recapture of depreciation, right?
Bruce
The most up to date info is always going to be in this article, as it will get updated with any tax changes.
Yeah, you’ll always get taxed 25% on depreciation recapture.
Where in CA are you selling?
Sacramento
HI,
I think I get it?? To be sure, I’ll give you my situation:
Purchased house in 12/07 and lived in until 9/15. Rented the property from 9/15 to 4/17 (anticipated), with the goal of selling by 6/17. I satisfied the two year rule (at least 2 years of 5) and I can take full $250K exclusion because from last date of residency (9/15) and actual sale date (6/17) is not considered “nonqualified period”.
I hope!!
Hey Bruce, see my comment above to your 2nd comment.
Hi,
Thank you for all of this information. I have another question that I am hoping you know the answer to or where I could find it. My mother inherited her home 50 years ago. The home is Free & Clear. The home is worth about 1 million in California today. The home is too big for her and she can not keep it up and needs to look to alternative living. She collects social security for about $800 a month and is barely surviving. She wants to sell the home but we don’t understand the tax stuff. My question is… If she sells the home for 1 Million can she turn around and reinvest in another primary residence without paying capital gains tax as long as the value is the same? if the value of the new home is less, for example $500,000 would she be able to still claim the $250,000 tax break and then only pay capital gains on the remaining $250,000 or is she responsible for the entire gains from the 1 million sell weather she buys another house or not? and who do I go to for this advise? a tax person or a lawyer?
Shayna, If your mother sells and reinvests in another primary residence where the fair market value is the same, then yes she can defer paying cap gains tax. If the value of the new home is less, she can claim a partial exemption, but probably not the full 250k because some of it will be attributed pro-rata to the 500k new home.
So, if she does not buy a house, she’ll be able to claim the full 250k exclusion but pay taxes on the remainder.
If she buys a house of equal or greater value, she can defer paying taxes entirely.
If she buys a house of lesser value, she’ll be able to claim a partial exclusion but will also have to pay some taxes.
In terms of professional advice, it depends on what kind of assistance you need: a real estate tax CPA vs. a lawyer can each be useful in different situations. Generally, a CPA will provide tax advice, while lawyer can actually structure / execute a transaction; if the lawyer is knowledgeable about tax, they’ll probably also be able to provide similar advice.
Question for you: Where is the home located in California?
Thank you for your advice. My moms property is in west Los Angeles near Mar Vista.
I have just recently remarried. Now I’m selling my home of sixteen years. Will my spouse be able to claim the $250000 exemption?
No
I initially purchased vacant land in my company LLC name for resale. I now want to build a home, live there for 2 years and then sell hopefully at a profit. do I need to transfer or quit claim the property into my personal name before building to take advantage of the tax exclusion?
You should probably speak with an attorney for a formal opinion, but I’m pretty sure it depends on whether the LLC is a single-person LLC or an LLC with multiple members. I don’t think your proposal will work if your LLC is multiple members. But it would probably work if it’s single-person because a single-person LLC is considered a “disregarded entity” for federal tax purposes.
One of the better explanations that I have found and notice you follow up on comments…..any insights you can add to my situation are appreciated
Bought house in California in 1996 and lived in it until January 2013
(Became unemployed in 2011 and claimed unemployment benefit until renting it out in January 2013 when we moved overseas)
Tenant broke lease in July 2016 so wife flew back to stay in house and get it ready to sell .accepted offer and should close November 2016
Can I claim safe harbor partial deduction for 2012 and what about the 5 months my wife has been at house can any portion of that be claimed?
Also due to lower wages abroad I have owed 0 taxes last 3 years what tax bracket does that put me in?
Last thing have taken approx $7000 a year in depciation last 3 years so 21000 when sold do I owe 25% of $21000
Thanks
You should definitely engage a tax professional; I’m not able to give you a formal opinion here. My layman’s view is: I’m not sure you can claim a safe harbor partial exclusion based on your unemployment status since so much time passed between the job loss in 2011 and renting the unit out in Jan 2013 – a tax advisor is better suited to advise you on that. The 5 months your wife was prepping the house for sale will count for purposes of her exclusion analysis but not for yours. Practically speaking, this means you’ll get less than the full exclusion amount since she’ll be entitled to more than you’ll be. Your biggest hurdle will be whether your unemployment status qualifies you for a partial exclusion – if not, you probably cannot exclude ANY amount for tax purposes because it doesn’t seem like you lived in the unit for 2 years during the last 5 years. Your questions about tax bracket and depreciation should be discussed with a tax advisor.
Excellent article! I am just starting to research capital gains rules and it can be very confusing. Your article is very helpful and easy to read. In my situation I believe I would qualify for the partial exemption but I was wondering if you knew of a way for the full exemption to apply. I recently purchased a condo as a primary residence with the plan to live in it for 3 years then sell it or rent it out. After purchase I learned that there is an offer from a company to de-convert the condos to rental properties and if passed by the board and agreed upon by the majority of owners, I will be forced to sell my unit. I will make a profit, however, because of the capital gains tax’s it won’t be much of one. Do you know of any loop holes that would allow me an exemption and not have to pay capital gains
Any info would be very helpful as the subject of de-converting properties is not discussed much on the internet.
Thank you
If you live in your condo for 3 years and then sell, you will be able to exempt up to $250k (if single) or $500k (if married filing jointly) – that’s the full exemption, not a partial one. There is no exemption allowing you to exclude more than that from capital gains taxes. You could do a 1031 exchange by purchasing a new property shortly after you sell your old one, but that won’t exclude your taxes, only defer them.
Hi,
I bought a house in 2006, and lived there until Jan 2013. Then I rented it out since then due to some financial difficulties, and commuting for over 50 miles from my work. Now I want to sell it.
Is there any chances to be tax excluded since I lived in the house for 14 months. What if I buy another house as my primary residential exchange and put all my profits towards the new house down. Am I still Qualified for any tax exclusion?
You probably won’t get the full exclusion if you sell it, but you might qualify for a partial exclusion if your job changed in 2013 causing your commute to extend over 50 miles. Even if you cannot claim a tax exclusion, if you buy another house you could do a 1031 exchange and defer your taxes. Your tax liability won’t disappear since you’ll still owe taxes on the gain from your first house, but your basis will simply move over to the new house and all gains will be deferred until you sell that new house.
Hi,
I bought a house in October 2014. Let’s say for 100000. Now my house is worth say 200000. Do I have to wait until after October 2019 to sell to get the exclusion or can I sell any time after October 2016?
Micah, you can sell anytime after October 2016.
Andrew, this was really helpful. My wife and I file jointly and we bought a home 14 months ago. Now we’re moving more than 50 miles for work. Does this mean we get a partial exclusion for up to $291,000 (14/24 * $500K)?
I don’t think the home has appreciated that much, so will we be eligible to avoid capital gains taxes on the entire sale?
Thanks for your help!
Todd, you’ve got the general idea. Thanks for reading.
Hello Andrew,
Informative article! Here’s my situation. My husband and I bought our house in 1999 and lived in it until 2012. We then separated and I have been renting since. My husband continued living in the home. We did not file for legal separation. We still share the same bank account and file jointly. When we sell the home can we claim the 500,000 exclusion or will we only qualify for 250,000 based on his occupancy the past 4 years?
Thanks so much!
Ginny
Ginny, you should consult a tax advisor to confirm, as my comment here is only based on a cursory analysis of what you’ve written here.
I think your husband will be able to claim 250k for his part, but I don’t think you’d be able to claim the entire 500k exclusion together. However, you might be able to get a partial exclusion for your portion, assuming you sell the house immediately, since you lived in the house 1 out of the last 5 years. If you wait until next year, however, I’m not sure you would be able to claim anything for your portion.
Since you didn’t technically live in the unit for the last 4 years, while your husband did, I believe the IRS would evaluate your residency status separately, as if you had not been married. I explained this in the article above. You also don’t seem to fall into a recognized exception (e.g., you said you did NOT file for legal separation). So your only valid exception seems to be that the period between the LAST date the home was used as a primary residence (2012) and the date the home is sold (whenever) is NOT considered nonqualified use. You’re still subject to the 5-year look-back, though, and in this case you have not lived in the house for 2 of the last 5 years…only 1.
Hi Andrew C. I have a question…ok i bought a house in March 2009 and lived in until December 2013. I bought a second house and moved in the new house in January 2014 . And rent out the first house from March 2014 until now May 2017… I’m going to sell the rental house in 2018.. do i have to pay for capital grains about 150,k ? Thank you!
Danny, the answer is laid out pretty clearly in the article I wrote above. You most likely will have to pay tax because you did not live in the unit for 2 of the past 5 years.
Hi Andrew. Thank you for your responsed .
I just read your new sample that apply after January 1.2009 … so in my case i bought the house in March 1st .2009 ….lived there over 4 years, then bought another house in December 30th 2013 and moved in to the new house .rent out the first house until now September 12th 2017…so my question is if i move back to the first house and live in there as primary house and the second house will be a vacation house for 1 month. Then sell the first house .Do i have to pay capital grain about 200k? Thank you very much!
Nevermind. I didn’t read carefully i got it now ☺
My husband and I are USC and my husband has been disabled since 1999. Currently we would like to sell our residence in foreign country which we have owned for more than 30 years. Our parents live in the house w/o rent while we are in the U.S. For the past five years after both my husband and I retired from work, we stayed there most of time (accumulated around 30 months.)
Do we qualify for the couple’s $500K exclusion when reporting tax?
You’d probably be able to claim at least a partial exclusion. I say partial because you might not qualify for the period from 2009 to when you last moved in 5 years ago. Since the house is located abroad, you may be eligible to claim a foreign tax credit to offset any US tax liability from the sale. You should consult a tax advisor for an official opinion and not rely solely on this comment for tax advice, though!
Great article! My situation is a bit different. My husband and I titled our house in an LLC’s name because we thought we’d be fixing it up and staying in it for only 6 months. Bad decision, we know. Now, we’ve been in the same house for 3 1/2 years, but would like to sell it within a couple of months. If we retitle the house from the LLC to our names and only live in it for a couple of months more, would we still qualify for the partial exemption? Would there be any benefits to doing this?
Meg, you should definitely speak with an attorney about this, as I cannot advise you on legal matters. But I’m pretty sure it depends on whether the LLC is a single-person LLC or an LLC with multiple members. I don’t think your proposal will work if your LLC is multiple members. But it would probably work if it’s single-person because a single-person LLC is considered a “disregarded entity” for federal tax purposes.
Thank you!
Hi, thanks for this!
My fiancée and I just bought a 3 unit building together in mid-December 2015 for $765k. The 3 units that were fully occupied at time of purchase.
We signed a “co-habitation” lease with the primary tenants for some bank loan reasons although we actually lived rent-free during this time at her parents house. The tenants did this in exchange for granting them 6 extra months before they had to move out. CA has a 60 day owner move-in eviction law, so we couldn’t move in right away anyhow.
The primary unit tenants vacated on July 1 2016 so that we could move in.
So “legally” we have a gray area where it says on paper that we lived there nearly the whole time.
My partner and I are getting married in October.
Almost exactly half of the square footage of the house is rented out for the other two units.
My questions:
– assuming we live there for 2+ years (until at least July 2018) …
– will we be able to take the full exclusion even though we rent out half the property?
– how would this be affected by whether or not we claim residency in December or July?
Thanks so much!
Mike, If you live there 2 years, you can take a partial exclusion. You can exclude the portion of gain attributable to your primary residence (only the unit you live in). But you won’t be able to exclude the gain attributable to the rental units, although you could qualify for a tax deferral via a 1031 exchange if you turned around and purchased a new property shortly after selling the old one.
How would you determine what % is attributable to primary residence vs. rental units? You’re gonna need a tax advisor or a good accountant, my friend. They’ll evaluate things like square footage and renovations. You could try doing it by Googling around for attribution methods, but you’re probably safest by just getting professional advice on this.
If you received mail and had utilities billed in your name at the property since December, you might theoretically be able to claim residency since December, but I wouldn’t personally recommend it. What happens if you’re audited and they interview the other tenants? There may also be other records that show you weren’t physically there. It’s risky and doesn’t seem right. The upside probably isn’t very much anyway given the fact that you have to allocate % for the exclusion as mentioned above, so doesn’t seem worth it IMO. The worst case is you have 6 months of non-qualified use, which isn’t terrible.
Thank you Andrew!!!
We own an s Corp and have had to reduce our salary due to problems in company ,we have borrowed on home and invested these monies to keep company going. Now we need to sell the property to pay off those loans and will rent a smaller property .married over 55 . We have had substantial gains but loans equal gains almost. Are there special circumstances which would help reduce tax on gains based on need to keep company and employees going? Or would it be better to rent property out and move ourselves to smaller rental generating revenue to pay loans?
Paul, There isn’t special rules to allow you to claim extra deductions due to your company and employee status. The capital gains exclusion rule is pretty strictly based on fulfilling the residency requirements and not having non-qualified use periods.
However, if you’re filing jointly with your spouse, you may be able to deduct twice the normal amount (up to $500k vs. only up to $250k).
Lastly, if you have net long-term capital losses, you could deduct any house gains above $250k/$500k to extend your tax deduction even further, but that situation won’t apply to most people. Definitely consult your tax advisor if you have substantial long-term capital losses that could be used in this way.
In general, unless you’re facing a balloon payment on the company loans, I feel it’s better long-term to hold the property (assuming it cash flows decently and can more than cover your mortgage/HELOC), rent it out, and amortize your company loans with the rental payments. Don’t touch your principal – because doing so triggers fees and taxes that eat away at your wealth.
Hi, Andrew,
I appreciate what you wrote about “How to avoid capital gains taxes when
selling your house”. Not a lot of people could make it clear like that. I still have a question though. I bought a house in June 2011. I rented it out till Jun 2015. Then I moved in immediately to make it my primary residence (June 2015).
(1) So if I sell my home in 2017 after living there for 2 years, do I have non-qualified use period ? We don’t have any special circumstances like changing jobs etc. If so, how long is the non-qualified use period ?
(2) Say in 2017 after living there for 2 years as primary residence, I rent it out again for 3 years. Then I sell it, that will be 2020 June, will I be able to get rid of the non-qualified use period and claim full exclusion ?
Thank you so much for your help. Look forward to hearing from you.
1. Yes, you have a non-qualified use period. It’s 4 years. Look at example 4 above.
2. No. Your non-qualified use period will still be 4 years.
There’s nothing you can do at this point to wipe out the non-qualified rental period from June 2011 – June 2015, unfortunately.
Thank you very much for the answer. Great job on clarifying those complicated tax rules.
Using the example above, if Julie bought in June 2011, lived in it for 9 months as primary residence, then rented till June 2015 and then returned to live in it for 2 years, wouldn’t the fact she lived in the home for 9 months initially make the rent period not considered nonqualified use?
And if that is the case she could then claim the full exclusion?
No. Only the period between the LAST date the home is used as a primary residence and the date the home is sold is not considered nonqualified use. In your example, the last date the home is used as a primary residence is presumably June 2017, which also happens to be the sold date.
This is a really great article, thank you! It sounds like I may qualify for exemption but would love to confirm if you agree.
My ex-fiance and I bought a house in April 2007. We broke off our engagement and I moved out in June 2011. He wanted to remain in the house so I agreed to give him time to get his finances in order to refinance me off the loan. He refused to refinance or sell the house and ultimately I had to hire a lawyer to force a settlement. Through this process he will be refinancing and paying me $75k which is equal to half the equity (we bought for $205,000).
I have not lived in the house for 5+ years, and do plan to use part of the money on a down payment for a new house. Does this situation meet the requirements of “unforeseen circumstances”?
Thanks in advance for any wisdom you are willing to share!
Amy,
In your case, I’m not sure the unforeseen circumstances safe harbor matters. You said you haven’t lived in the house for 5 years (since 2011). But the threshold test is whether you occupied the property as a primary residence for at least 2 of the last 5 years. Since you haven’t, the unforeseen circumstances safe harbor doesn’t even come into the picture: it doesn’t sound like you’re eligible to exclude any gain from taxes.
If you use the proceeds as a down payment for a new house, you might be able to defer taxes, but I don’t think you’ll be able to exclude them entirely.
Hi,
very good information. I have a different situation, as my wife and I bought our house 27 years ago.
Since then my wife has developed strong permanent allergies to trees, which we have, and have to move for her health condition. Is there, regardless of the $500,000 capital gain exclusions, any additional exclusion in that situation? Also, considering we had this house 27 years, is the capital gain to pay a long-term rate or not.
Thanks for your help,
Henri
Henri, Yes, your capital gains tax will be long-term. There is no additional exclusion above and beyond the first $500k gain.
Hey Andrew,
Great article! I’m looking for advice on my situation. I am married and have filed separately for the past 3 years (2015, 2016, 2017). My wife and I had owned 3 properties in 2017. We sold one primary residence house in September 2017, where I was the only one on the Title and I claimed the exemption on my taxes only because both my wife and I had met the requirements and the capital gain was 50 miles, which is great. I wanted to verify with you that since neither my wife or I have lived in the home for the 2 year minimum that that was the best option available to use?
I had spoken with a CPA briefly and they mentioned that because my wife and I file separately and only I was on the title of our last primary residence sold in Sept 2017 that I could quit claim it over to my wife and she could file for the $250k exception since she hadn’t used it in the past 2 years. After reading your article I think we don’t qualify per the 2 year min anyways, but just wanted to hear someone validate that.
Thanks!
Nick
I bought my house for 122,000 in June 2014. I was single at the time. I lived there until Sep16. I rented it out from Sep 2016-Aug. 2017 (one year). I moved back in in Sep 2017 with my girlfriend who I later married in May 2018. I have lived there until May 2019.
I am about to sell my house in May 2019 for 167.500. If my understanding is correct I will be exempt from any taxes because I satisfy 2 year residency even though my wife does not correct?