Do we qualify for a partial exclusion for capital gains tax?

[Christian Mendonca]

My wife and I bought a coop in NY at the end of June 2014. She moved to GA for a job November 2015, I joined her at the beginning of April 2016. Staring in March 2016 we began renting our apartment to a friend at a small loss and didn't claim any depreciation on the apartment in our tax returns for FY 2016 and 2017. We put the coop on the market at the beginning of this month as we bought a home in GA last May and our friend's lease of our coop expires at the end of this month. 

With all that said, we are trying to determine if we are still eligible for the partial exclusion of capital gains tax due to the job move. Obviously a move from NY to GA is over 50 miles, so we qualify for the "job move" eligibility test. My concern is that the IRS won't deem us eligible since it's a little over 2 years since my wife took the new job and almost 2 years since I moved to GA to join her and no longer claimed the coop in NY as my primary residence. We've spoken to to CPAs and even a family friend who has recently retired from the IRS, and they all think we should be fine since the tax code doesn't have any verbiage on how soon after a job move you have to sell a home.

You'd think with those opinions we'd be comfortable moving forward, but we're both still nervous that come next year when we file our taxes we will end up being audited and owe back taxes for the capital gains on the home. Any and all thoughts/opinions are appreciated. I will tag one particular person on this forum (Brandon Hall) as my search on a related topic seemed to deem you as one of the experts on this subject :)

Thanks in advance for everyone's time and consideration!

-Christian

[Michael Plaks]

@Christian Mendonca

There is some room for debate here, meaning the IRS could potentially challenge this position. That said, the IRS can (and does) challenge even the most non-controversial positions.

If you were my client, I would have endorsed your partial exclusion. Not sure if you realize this, but partial exclusion percentage applies not to your gain but to the maximum allowed exclusion. Therefore, even with partial exclusion you might be able to exclude 100% of it.

How you treated it for the years of renting to your friend is a separate conversation, with possible complications if you rented it at below market rate. If you did rent it at the market rate, then you will have to reclaim (pay taxes on) depreciation that you were supposed to claim but did not. Discuss with a tax accountant experienced in real estate.