Partial home gain exclusion on rental property

Forum|Forum|1 year ago
November 7, 2024
1 reply
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This is the situation,

Purchased apt and lived as primary residence 11/5/2017.

I started searching for a larger home due to space constraints and my family's need to work from home due to the unforeseen COVID pandemic.

I bought a new home and moved in on 2/28/2022. I rented out apt 3/1/2022.

Its my understanding that if I sold this apt and closed on or before 2/28/2025, I would qualify for the full home gain exclusion. My question is, if I sold after this date, would I qualify for the partial home gain exclusion? The 2 year live in qualification would be waived/prorated due to covid unforeseen circumstances.

Thank you

Mike9241

I don't think it's possible to give a definitive answer as to whether you would qualify for the partial exclusion.

reg 1.121-3(b) states, for purposes of the partial exclusion,

Whether the requirements of this section are satisfied depends upon all the facts and circumstances. Factors that may be relevant in determining the taxpayer's primary reason for the sale or exchange include (but are not limited to) the extent to which—

(1) The sale or exchange and the circumstances giving rise to the sale or exchange are proximate in time; (is 3 years proximate or not?)

(2) The suitability of the property as the taxpayer's principal residence materially changes; (I would say yes to this)

(3) The taxpayer's financial ability to maintain the property is materially impaired; (not relevant evidently)

(4) The taxpayer uses the property as the taxpayer's residence during the period of the taxpayer's ownership of the property; (only about 5 of 8 years)

(5) The circumstances giving rise to the sale or exchange are not reasonably foreseeable when the taxpayer begins using the property as the taxpayer's principal residence; and (yes to this in my opinion)

(6) The circumstances giving rise to the sale or exchange occur during the period of the taxpayer's ownership and use of the property as the taxpayer's principal residence. (no ownership yes - use - no)

also, regardless, you'll have to recapture depreciation allowed or allowable during the rental period. this comes before the home sale exclusion.

maybe another will add a tax case or their thoughts to this.

my advice would be to sell, if possible, while you meet the two-year ownership and use test and thus avoid any IRS challenge.

AmeliesUncle

(1) The sale or exchange and the circumstances giving rise to the sale or exchange are proximate in time; (is 3 years proximate or not?)

Because your circumstance doesn't meet a specific "Safe Harbor", you are subject to the list of factors that Mike pointed out.

In my opinion, there is no way that the IRS would consider renting it out and waiting three years to sell the property as "proximate". For that matter, it probably would be most like five years, because the "circumstance" (working from home due to Covid) likely started in early 2020.