Capital gains question on sale of condo

[Mike H.]

Hello BP !

wife bought a condo in NYC 15 years ago.  We lived there til we had a baby and moved out to rent a 2 bedroom.  We wanted to list it sooner but life and covid got in the way and are going to list it in a few days.  Sept 10th will be our 3 year anniversary of vacating the property.  Talking to our realtor she said even if we got an offer today it will be a challenge to close by 9/10.  Typically it takes 45 days to close here.  There is attorney review.  Condo board approval etc.  

If we do actually sell the property it will be a good problem to have.  So not too big a deal.  If we get asking price we will have about 150k liable for cap gains tax.   I'm assuming there's no wiggle room on the 9/10?  Like if we close 9/20 IRS won't say "well close enough" ?  

If we close after 9/10.  I guess our options are to buy another investment property with the 150k to avoid paying the 20k in cap gains.  our family is considering buying a lakehouse together.  I'm assuming we couldn't put the 150k in to the lakehouse as a 1031 exchange cause that would be a second home - not an investment property... 

Any thoughts on our situation?  Thanks!

[Michael Plaks]

Originally posted by @Mike H.:

Originally posted by @Justin Schmid:

@Mike H. I’m not a tax attorney but I believe you could temporarily move back in (just put a bed in and sleep there. Until you close that way if you go past the Sep. date, you will have homesteaded 2 of the last 5.

Haha!  very interesting thought.  I don't know i'd have to run that one by the wife.   

No need to run it by wifey. Justin's suggestion is well-intentioned but very counter-productive. It will screw up your eligibility for an exclusion by triggering the nasty "non-qualified use" rule. That little-known rule will force you to pay a portion of capital gain tax even if you could avoid it otherwise. Do NOT move back unless necessary for life reasons.

However, you actually might have a reprieve from the 9/10 deadline due to Covid. There're IRS Regulations that allow for an exception ("reduced maximum exclusion") under "unforeseen circumstances." While there is no black-and-white safe harbor rule for your circumstances, I have a feeling that we could interpret these Regulations in your favor. 

This would be controversial and therefore potentially subject to an IRS challenge which you could win or lose, but if this happened to one of my clients and the client felt good about taking some risk, I would pursue this route. Discuss with a good accountant specializing in real estate such as my colleagues contributing to this forum.