How does IRS calculate 2 years as primary residence for tax exemption

[kevinchh]

I want to sell my primary residence next year and want to see if I qualify for the $500,000 tax exemption when I file my 2022 year's taxes. I filed my 2020's taxes at this address and will file 2021 at this address as well. If I sell the property in 2022, would I qualify for the tax exemption?

[DanPaul02]

The rule goes exactly by the date that you moved in and the date that you moved out.  To qualify for the tax exemption, you have to have lived in the house for a full 24 months, regardless of when you filed tax returns.

[macuser_22]

If you and your spouse own and physically occupied the home for 2 of the last 5 years then you qualify.     You determine that, not the IRS.   Lying on your tax return is a Federal felony.

[macuser_22]

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@DanPaul02 wrote:

The rule goes exactly by the date that you moved in and the date that you moved out.  To qualify for the tax exemption, you have to have lived in the house for a full 24 months, regardless of when you filed tax returns.

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Not quite correct.  It is any 24 months of the previous 5 years.  The date you moved in and moved out is irrelevant as long as it is 2 years in the last 5 years (you might have lived in it for 2 years and then rented it out for 3 years)

See IRS Pub 523, page 3.

https://www.irs.gov/pub/irs-pdf/p523.pdf

[Mike9241]

further guidance. either spouse can own the home for 2 out of the 5 years ending on the date of sale but both must have occupied it as their principal residence for the 2 out of 5 years ending on the date of sale.  there is a frequency limitation so, during the two-year period ending on the date of sale, neither spouse excluded gain from the sale of another residence. for the occupancy test the two-year period does not have to be the same for each spouse. for the ownership test treat both spouses as owning the property for the longest period owned by either spouse.

[Carl]

You must have lived in the property as your primary residence for 730 days or more, of the last 1826 days you owned it, counting back from the closing date of the sale.

IRS Publication 523 at https://www.irs.gov/pub/irs-pdf/p523.pdf on page 3, 2nd column under "Eligibility Step 3 - Residence". (Make sure you read all the steps, as if you meet Step 1 for automatic disqualification, you can stop there)

[dougcc]

How about this scenario: husband has lived in house at least 24 months in past five years, but wife has not, due to a second residence (which is rented, not owned). House has been owned by both spouses for more than five years.  They sell house. Cap gain is $400K.

QUESTIONS

(1) Because the wife doesn't have the required 24 months there, can this couple file separately in the year of that sale, and husband take the individual exclusion of currently $250K, rather than the joint married exclusion of $500K?

(2) And if they do file separately, can the entire cap gains be listed only on the husband's taxes, so that he can maximize that exclusion? Or does the cap gains have to be split equally and listed into both of their separate returns?

[Carl]

@dougcc there is no need to file separately. If you were married on Dec 31 of the tax year, you still file as married filing joint. When it gets to the sale of the residence the program will ask questions about each individual taxpayer concerning how long you have lived in the home as your primary residence. You will say that yes "YOU" lived in the house for 2 or more years. Then you will say "YOUR SPOUSE" did NOT live in the house for 2 or more years. The program will figure your exclusion accordingly. Since one of you did live in the house for more than two years, you're getting at least the $250K exclusion at a minimum.

[dougcc]

Thank you much for clarifying this.