Capital Gains primary residence

[John Hylton]

Hi guys, We bought a home last year (essentially a long term flip), and we decided to make it our primary residence for a bit. The reason was two-fold; it met our current needs as well as would keep us from paying capital gains tax. I know the law that if you live in the property for 2 years out of the last 5 years, you don't pay gains tax on $250k gains if single or $500k if married. My question is, when does the 2 year clock start? We closed on the home in August 2015.. We were renting a home in the meantime while we began a large renovation. We didn't physically move into the property until March of 2016 (when we also refinanced the property). I have been told by a few that my clock started the moment we bought it and therefore we could sell it in Aug 2017 and pay no gains tax. I want to make absolutely sure so we don't mess up by selling 7 months too early. Anyone have any real good insight to this? I appreciate any facts that might give us our answer. Part of me feels that if you are living in a home but move out for a few months to renovate, it would still be considered your primary to the IRS and this is more or less the same thing? Thank you again for your help.

[Brandon Hall]

@Account Closed no, the IRS will consider aggregate evidence/information. But if you want to prove residency relatively easily, internet is a good bet.

Many people have hotspots, however statistics show most households within certain demographics have hard wired internet.

You only need to prove residency if audited, but you should have a conversation about it with your CPA so that you're not scrambling to fine documents five years later. That's how audits turn into painful and expensive messes.

Again, burden of proof is on the taxpayer. The IRS could theoretically assume you never lived in the property and tell you to "prove it" and based on the information you provide will prompt further question.

For instance, if I were in the auditor shoes and auditing you, I'd consider utilities and mail forwarding, however I'd also look at bank and credit card accounts to see when the billing address was switched over. Id double check your tax returns to review your listed mailing address. I'd also want to understand how the property was purchased and in what condition it was purchased. If purchased in a rehab state, I'll place less of an emphasis on utilities and address changes being used as support. Instead I'll request bank statements that show the money being wired out as well as anything that may indicate a rehab is occurring. I'll check with the city for dates permits were pulled or a cert of occupancy was assigned. 

But the thing is, I only have to find one piece of evidence that supports a certain move in date, then I get to tell you "prove me wrong." 

Keep in mind though that auditors these days are not jumping through those hoops.

Hope this helps!