I was forced to sell my rental property due to a job loss and unemployment. I'm reading that this qualifies and an unforeseen circumstance that would allow be exclusion?

[byrne280]

 I'm now just outside of the 2 of the last 5 years rule where I could be excluded from capital gains. However in reading more closely, there are many exclusions and one of them I qualify for. I was actually forced to sell this property due to loss of a job and qualifying for unemployment. When unemployment ran out, I was forced to sell the property. 

Some of the text I found is copied below:

In Final Regulations issued by the IRS, the sale or exchange of a primary residence is deemed to be because of "unforeseen circumstances" if it is sold because of the occurrence of an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence. Some of the specific examples of these types of occurrences include:

This also includes the following if it applies to the taxpayer, the taxpayer's spouse, a co-owner of the home, or a person whose principal home is in the same household as the taxpayer:
 - Death 
 - Lost employment and becoming eligible for unemployment compensation
 - A change in employment or self-employment that resulted in an inability to pay housing costs and reasonable basic living expenses for the household (including amounts for food, clothing, medical expenses, taxes, transportation, court-ordered payments, and expenses reasonably necessary to produce income, but not for an affluent or luxurious standard of living)
 - Divorce or legal separation under a decree of divorce or separate maintenance
 - Multiple births resulting from the same pregnancy

[Opus 17]

What do you mean, "just outside"?  The partial exclusion refers to selling early, not selling late.  If you don't meet the 2 years of the last 5 because you moved out more than 3 years ago, you don't qualify and the hardship rule doesn't apply.

What are your dates of purchase, sale, residency, etc.

[byrne280]

Read below where is says there are a few exceptions, however.  #5 applies to me.


To qualify for a full exclusion, you generally must own your home for at least two years during the five-year period prior to the date of sale. There are a few exceptions, however.

1. If you had postponed gain on the home you sold under the old "rollover" rules, enter here the purchase date of the earlier home which you "rolled into" this home. If you had rolled over more than one, enter the date of the earliest purchase in the series. Once you have a date more than two years prior to your current sale, though, there will be no tax consequence of entering an earlier date.

2. If your spouse died and had owned the property longer than you, enter here the date your spouse purchased the property if your spouse also lived in it as his or her main home during that period.

3. If your spouse transferred the property to you (or if your former spouse transferred the property to you incident to divorce), enter the date your spouse (or former spouse) purchased the property.

4. If a prior home was destroyed or condemned and the basis of the home you sold depended on the basis of that prior home, enter the date you purchased the prior home.

5. You sold the home due to unforeseen circumstances. These can apply to you, your spouse, or anyone else living in the home. Unforeseen circumstances include:

 - Change of health
 - Death, divorce, or legal separation
 - Multiple births (twins, triplets, etc.)
 - Change in place (more than 50 miles) of employment
 - Receiving unemployment benefits
 - Change in employment leaving you unable to pay mortgage or basic living expenses
 - Military or foreign service
 - Natural or man-made disaster
 - Act of war or terrorism
 - Condemnation, seizure, or other involuntary conversion
 - Other unforeseen circumstances

Active-duty military and foreign service members may be able to look back over a period of time greater than five years. You can read about this exception.

For further information and examples, see IRS Publication 523, Selling Your Home.

[KrisD]

No, the exclusions you are referring to are for "Primary Residence" (your main home) not rental property. When you sell a rental, it is not selling your home, it is selling an investment property/asset. 

[byrne280]

Why would there be a need for this exclusion then?

[Opus 17]

If you sell the home you live in -- your primary residence -- you can sometimes avoid paying capital gains tax.  If you live in the home at least 2 years, you can exclude up to $250,000 or $500,000 if married, of capital gains.  This is one example of Congress trying to do social engineering -- change tax laws to encourage things that they think are good for society -- in this case, owning your own home.  Home owners who live in their own homes pay less capital gains tax than investors who rent their property out to others.  People who buy homes to flip them also pay capital gains, even if they live there, unless they own the home for at least 2 years.

The hardship rule applies when someone who is a legitimate home owner (not an investor or flipper) needs to move after owning less than 2 years for a hardship.  They may qualify for a partial exclusion of their gain.

The hardship rule doesn't apply to flippers or investors because the exclusion rule doesn't apply to them either.  If you have capital gains on investment property, it is always taxable, unless you do a like-kind exchange (which postpones the tax, but does not make the transaction tax free.)

[byrne280]

I didn't want to spill out my personal stuff on here but I guess it will be necessary. I was forced to move from this residence in 2013 in order to be closer to Children's Hospital for appointments for my son who was born with severe health complications. At that time, the property was upside down and I would have had to pay someone to take it. So I converted it to a rental and used my VA benefits to qualify to by the home near the hospital. 5 years later, I was laid off from my job. After my severance and unemployment benefits ran out, I was forced to sell my former residence in order to pay off bills that allow me to stay in my current home.

Both medical conditions and qualifying for unemployment are exceptions to the 24 month rule. So I don't see why I wouldn't qualify for exclusion to capital gains here?

[KrisD]

I am sorry for your pain and hope things only get better for you and your family.  I have heard of cases won in tax court when the home was rented but also was on the market and available for sale. In my opinion, your argument would not hold up in tax court. If you have been in your primary residence near the hospital for at least 2 years, you could sell that home and take the exclusion from gain on that sale.

[Opus 17]

You don't qualify because your eligibility to use the 2 year/5 year rule expired in 2016.  If we assume you moved out on June 1, 2013 and turned the home into a rental, then your eligibility to qualify for an exclusion ended on May 31, 2016.  Since you kept the home as a rental past that date, the exclusion rule no longer applies.

The point of the 24 month rule is that you must have owned the home and lived in it for at least 24 months to ever use the exclusion.  If you move out after owning less than 24 months due to a hardship, you might qualify for a partial exclusion.  For example, you buy a home on June 1, 2016, and move out June 1, 2017 for a hardship--less than 24 months.  If you sell (instead of converting to a rental) you can take a partial exclusion.

Assuming you owned the home from at least 2011, then you already meet the 24 month rule and the hardship exception is irrelevant.  What you are seeking relief from the is other part of the 2 year/5 year rule, that you must have lived in the home at least 2 of the 5 years ending at the date of the sale.  The only exception to that part of the rule is if you are displaced from your home for military duty or foreign service.  You could have sold any time between 2013 and 2016 and excluded your gain.  By keeping the home as a rental longer than 3 years after moving out, you no longer qualify for the exclusion.  Perhaps it would have been wiser to sell the home before your eligibility ran out, but you probably could not have predicted the layoff.

I don't know anything about "holding out for sale" versus actually selling the home...but I think you would have a tough case and would lose.

[byrne280]

Thanks for the help! just don't want to leave any stone unturned.