Question

Can I prorate capital gains if we lived in a place for less than 2 years, rented for 4 years? We converted it into rental property when I was transferred by my company to the US.

Forum|Forum|4 years ago
August 30, 2021
2 replies
0 views

Like the title suggested, here's a timeline of our property:

Bought and lived from Oct/2015 till Jul/2017;

Transferred to the US by my company in Jul/2017;

Rented from Sep/2017 till May/2021;

Sold in Jul/2021.

This property was owned by me and my wife together, and we have owned and used it as our primary residence for roughly a year in the past 5 years from selling date. We never used it as rental property before using it as primary residence.

The reason for selling is because of my job relocation & change in immigration status, when early this year it looks like I won't be kicked out of the country by the time my visa expires next year (before this I was working on a working visa that expires in 5 years and cannot be extended).

I thought the period of renting out would not count as non-qualified use, and the sale would qualify for the safe harbor as discussed in some other posts. Consequently, it would qualify us for roughly half the maximum exclusion amount, sine there was 1 year of primary residence in the past 5 years by me and my wife. But thought I would like to check with the forum if my understanding is correct for my circumstances. Thank you for your help!

Hal_Al

Employee

Based on court decisions, no partial exclusion for selling for health, change of employment or unforeseen circumstances would be available if the sale is more than 3 years from the time you moved out.

A

AmeliesUncle

I have have asked you this before, what WHAT court decisions? From what I read, the Regulation clearly says that it DOES qualify for the Reduced Maximum Exclusion.

Hal_Al

Employee

I'm quoting Champ @Mike9241 and am not interpreting the regs myself. Reference:

https://ttlc.intuit.com/community/state-taxes/discussion/re-i-lived-in-my-primary-home-ca-from-10-2012-until-11-2017-and-moved-to-tx-ca-rental-1-1-18-to-6-9/01/2331409/highlight/true

That said, it doesn't make sense that somebody who meets the 2 year rule loses the exclusion because they waited too long to sell, but somebody with an exception to the 2 year gets the exclusion. Surely, there's been tax court cases on the issue. Yes, I know there's lots of stuff in the tax code that doesn't make sense.

J

jaxolist2Author

Thank you all @AmeliesUncle @Carl11_2 @Anonymous_ for your input and discussion. The situation regarding our case is much clearer to me now.

If I may summarize the key points that enable us to have the prorated maximum reduction:

- Circumstance change (job relocation) happens when I used it as our primary residence, and as such, converting it to rental property does not disqualify us.

- Distance safe harbor supersedes the requirement of time approximation between circumstance change & sale, which we will certainly qualify due to international relocation.

Consequently, as this property was owned and used as primary residence by me and my wife for approximately a year in the last 5 years, we are entitled to have roughly half the combined maximum exclusion, i.e., ~ 250K.

Thanks again for all the help!

*Unfortunately I was locked out of original account and cannot find my password, so can't vote any of the answers as adopted.*

A

Anonymous_

Employee

@jaxolist2

I do not believe it has been mentioned in this thread, but recall that any Section 1250 unrecaptured gain (as a result of depreciation during the rental period) has to be factored into the equation.

Carl11_2

Employee

Tagteam pointed out a rather important aspect that you must be clear on.

When you sell the property, all depreciation must be recaptured in the year of the sale. That recaptured depreciation is taxable no matter what, with no exceptions. It is not included in the "2 of last 5" rule. Take note that the recaptured depreciation does get added to and included in your overall AGI. Therefore, it is perfectly possible the increased AGI could bump you into the next higher tax bracket.