Tax Deductions for a Live in Flip

[Vlad-Stefan Marcu]

Hi all,

I am planning on purchasing a SFR with the intention of living in it for 2-3 years, making upgrades, and selling when I move out. Would this be considered an investment property where I can deduct depreciation expense from my personal taxes?

In general, what distinguishes a "primary residence" from an home purchased with the intent to flip?  Is it the amount of time held?

[Brandon Hall]

@Vlad-Stefan Marcu

Your home will more-than-likely be considered your principal place of residence which will qualify you for the Section 121 exclusion of $250k ($500k if MFJ). 

Below I've copied text from Pub 523 - Selling Your Home

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If you own or live in more than one home, the test for determining which one is your main home is a “facts and circumstances” test.

The most important factor is where you spend the most time. However, other factors can enter the picture as well. The more of these that are true of a home, the more likely it is your main home. 

The address listed on your: 

• U.S. Postal Service address,
• Voter Registration Card,
• Federal and state tax returns, and
• Driver's license or car registration.

The home is near:

• Where you work,
• Where you bank,
• The residence of one or more family members, and
• Recreational clubs or religious organizations of which you are a member.

You can exclude up to $250,000 of gain ($500,000 if married filing jointly) on the sale of your home if you meet the Eligibility test.

Eligibility Step 1 - Automatic Disqualification

Determine whether any of the automatic disqualifications apply. Your home sale is not eligible for the exclusion if ANY of the following are true:

• You acquired the property through a like-kind exchange (1031 exchange), during the past 5 years. See Publication 544, Sales and Other Dispositions of Assets.
• You are subject to expatriate tax. For more information about expatriate tax, see chapter 4 of Publication 519, U.S. Tax Guide for Aliens

Eligibility Step 2 - Ownership

Determine whether you meet the ownership requirement. If you owned the home for at least 24 months (2 years) during the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement.

If you received Form 1099-S, Proceeds From Real Estate Transactions, the date of sale appears in box 1 of Form 1099-S.

If you did not receive Form 1099-S, the date of sale is either the date the title transferred or the date the economic burdens and benefits of ownership shifted to the buyer, whichever date is earlier. (In most cases, these dates are the same.)

Eligibility Step 3 - Residence

Determine whether you meet the residence requirement. If your home was your residence for at least 24 of the months you owned the home during the 5 years leading up to the date of sale, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period. It doesn't even have to be a single block of time. All you need is a total of 24 months (730 days) of residence during the 5-year period.

If you were ever away from home, you need to determine whether that counts as time living at home or not. A vacation or other short absence counts as time you lived at home (even if you rented out your home while you were gone).

If you have a disability, and are physically or mentally unable to care for yourself, you only need to show that your home was your residence for at least 12 months out of the 5 years leading up to the date of sale. In addition, any time you spend living in a care facility (such as a nursing home) counts toward your residence requirement, so long as the facility has a license from a state or other political entity to care for people with your condition.

Eligibility Step 4 - Look-Back

Determine whether you meet the look-back requirement. If you did not exclude gain for selling a home on your tax returns for the previous two years (and you do not intend to do so on any returns or amended returns for the past two years that are not yet filed), you meet the look-back requirement.