Selling home after 1.5yrs - Will Capital Gains Tax be Excluded?

Question

Hey All,

Has anyone had any success with having their capital gains tax excluded upon sale of your property after living there for only 1.5 out of the last 5 years?

In Garrett Sutton's book, "Loopholes of Real Estate", Chapter 11, he writes that a "year" is justified if you lived there for the majority of that calendar year... therefore living in your primary residence for 1yr and 7months consecutively should grant you the Primary Residence Exception, right? He also mentions that under special circumstances you can get a pro-rated exclusion, but first want to see about the whole exclusion.

Any accountants have a take on this?

Thanks!

-Trevor

Joe Splitrock · Answer

@Trevor Jaye if the IRS wanted it to be 1.5 of 5 years, that is what they would have written into the tax code. It says 2 of 5 years repeatedly. I don't see how any logical person thinks this isn't clear. It is great to get input from others, but there is a lot of bad advice in the world. You need to use common sense and go directly to the source if in doubt. It seems you are looking for sketchy shortcuts, which is a dangerous mindset. Those are the type of people that end up audited, fined or even jailed by the IRS.

There are prorated exemptions you can take in certain circumstances, which is further evidence to support that 2 years means two years. Why would they offer partial exclusion for 1.5 years if that was the same as 2 years? Here is a direct link to the section "Does your home qualify for partial exclusion of gain?":

https://www.irs.gov/publicatio...

Here is the full IRS publication 523 "Does your home qualify for the exclusion of gain?":

https://www.irs.gov/publicatio...

Basit Siddiqi · Answer

You need to continue owning/living in the place until you are at 2 years to get the full exemption under section 121.There is partial exclusion for those who move for job, medical or an unforeseen circumstance.

Joe Splitrock · Answer

This doesn't seem right at all. You need to meet the special provisions if you lived there less than two years. Even then, the prorating is on actual amount of gain, not on the exclusion amount. Think about this logically. What is the purpose of having special provisions for partial gain if you just took the full gain tax free, without meeting any special provision? Even when you are allowed to prorate, it is not the exclusion amount that is prorated. Read the IRS document. You seem to have a creative accountant.

Basit Siddiqi · Answer

That sounds incorrect if he is not factoring in medical leave, job transfer, unforseen circumstance - Another thing with the partial exclusion is that the sale needs to occur immediately and not be one of those things where you live in it for 1 year, move out for 3 years and then want to take a partial exclusion.

Wayne Brooks · Answer

@Trevor Jaye No….the idea of “1 year and 7 months being the same as 2 years” is total BS.  The code says “2 years or more” or “at least 2 years”. If you meet one of the listed exceptions (had to move for work, etc you can still get a prorated max exclusion.

Account Closed · Answer

If you were the IRS looking for revenue, would you grant an exception on something like this because someone on a forum stated it might be okay? You never really know until the audit hits you. The mean man from the IRS will ask you this question: "Who gave you that advice?"

Stick to asking your CPA or Tax Lawyer, in person, in a meeting and pay for the advice. They can represent you in tax court if necessary. You'll thank me later. ;-)

Trevor J. · Answer

Thank you all for the detailed advice. This is a good example of taking things you read with a grain of salt and never forgetting to throw in your common sense... as much as BP loves to rave about this book and this author, this particular advice from the book seemed too good to be true - it seems like this thread agrees.

-Trevor

Joshua Morgan · Answer

@Basit Siddiqi

In this case, it will be an immediate sale - no non-resident ownership directly preceding sale. Just re-read his email and he did qualify his determination by saying we can qualify since the intention when purchased was for purpose of primary residence.

JM

Joshua Morgan · Answer

@Trevor Jaye

Not a CPA. I'm in a similar situation, looking to sell my primary residence after taking residence ~1.7 years ago. My CPA told me that in this case, only 1 year was fully satisfied. However, I could prorate the exclusion to account for only 1 of 2 requires years being satisfied. For us (married filing jointly) that means we can only exclude 250k in gain from sale, as opposed to 500k exclusion of 2 full years had been satisfied. In our case, the reduced maximum exclusion to 250k is plenty to fully cover the potential gain on sale. He indicated that in this arrangement, no special provisions (medical leave, job transfer, etc) was needed. Obviously talk to your own CPA.

Bill B. · Answer

I can’t tell if you’re talking about..

A property that has only been your primary (plenty of correct answers above, get to 2 years unless you moved a significant distance fir work for a partial exemption.) if it’s a large gain it will pay for itself to stay the 6 extra months.

A property which you lived in and then turned in to a rental. In this case you’re hosed because the time you lived in it will be rolling off as you are adding more time and you will end up in the same situation as scenario 3.

A property which was a rental before it was your primary. In which case you always get a prorated percentage of time it was a primary compared to a rental AFTER living there 2 years. Not the full exemption.

Selling home after 1.5yrs - Will Capital Gains Tax be Excluded?

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