121 Capital Gains Exclusion

[Michael Hajduk]

Hi, I was wondering if anyone out there has experienced this scenario before. 

I physically resided in my primary residence for 22 months, then was sent out of state for a year-long training course. I fully expected to return to my house. About 6 months into the course, I found out I was not returning to my city, but instead being sent overseas. At that point, I put it into service as a rental, hired property management, rented it out, and started claiming rental income and losses, etc.  

If I otherwise meet the 2/5-year rule, am I able to exclude capital gains on the sale of this home? For 28 months I would have told anyone that was my house, and I can provide documentation to the IRS if need be. I have a CPA checking into this for me, but I wanted to see what everyone else thought too.

Thanks!

[Ashish Acharya]

Originally posted by @Michael Hajduk:

Yes. 

I understand I get a 10-year "pause" to the rule. I am selling in well within that period. 

I need to know if the IRS is going to base my eligibility on the time I physically resided there, or the time before I knew I wasn't moving back and thus converted it to a rental.  One of those numbers is under 2 years, the other is over 2 years.

 Michael, You will qualify for the exclusion. There are two facts that support your qualification. 

First:

Even though you physically did not live in the house, you still can count that as if you lived there. IRS uses Fact and Circumstances to determine if the house is your main home. Here are few criteria to judge if your house is your Primary residence when you lived on it.

The house is your main home if:

1) the address is listed as your postal service address,Voters card, on your tax return, or licenses

2) the home is near your work or near any organization where you are involved, where you bank, residence or one of more of your family member

Time time that is before you decided to rent it out still qualifies as your primary residence because you address was on all your documents. 

Second:

Per IRS:

"If you are a member of the Uniformed Services or the Foreign Service, or an employee of the intelligence community in the Unites States, you may choose to suspend the 5-year test period for ownership and use if you are on qualified official extended duty. This means you may be able to meet the 2-year residence test even if, because of your service, you didn’t actually live in your home for at least the 2 years during the 5-year period ending on the date of sale. "

So the time you were away for the training counts as qualified official extended duty and your time away counts towards your 2 years. 

Any advice contained in this post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this document.