I have owned my home for five years. Initially I rented it then used as my residence for three different periods. The total number of days l lived in the home total more than 730 days. An example is 200 days as my residence followed by renting 365 days then my residence again for 200 days followed by another rental period of 300 days then my residence again for 365 days. The total is over two years as my residence during this five year period. I lived outside the USA during the time I rented the home. Would this be considered qualified use of the home for the capital gains exclusion? I owned no other home during this period
It's qualified use. TO qualify for the capital gains tax exclusion the property must have been your primary residence for at least 24 months of the last 60 months you owned it, counting backwards from the closing date on the HUD-1 statement you will receive at the closing when you sell it. The 24 months do not have to be consecutive. but they must all have been within the last 60 months you owned it.
OK thanks. I did go back and look at the depreciation which I then added up and entered on Turbotax and it then gives me the exclusion minus the depreciation. I haven't been able to get an answer from the IRS on this as they don't take these questions during this time period. I have never had a tax person or CPA so ya...Thanks a lot!!!
Remember, for the depreciation recapture to include 2016 too. You have to add together prior year's and current year depr to get the correct figure there.
Because you used it as your residence AFTER it was rented, the exclusion is prorated. It is best explained by a simplified example.
Let's say you bought the house for $100,000, sold it for $150,000, and took $10,000 of depreciation. Let's also say it was your Principal Residence for exactly 60% of time (the actual calculation uses days), and it was your residence when it was sold.
In that scenario, the $10,000 of depreciation can not be excluded. For the other $50,000 of gain, you can exclude 60% of it. So you can exclude $30,000, but you will pay tax on the other $20,000 (plus the $10,000 of depreciation).
It does matter who was the last to move out prior to the date of sale... the owner or the tenant.
The 60% being the time I actually lived in the house? I am actually going to make it 732 days of my total occupancy and a total of five years and three months of owning. It will be my residence when I sell. A bit confused and this may change my decision on what to do with the home. I lived overseas during this time and not in the military or special assignment.
The percentages do not matter and are totally irrelevant. If you lived in the house as your primary residence for at leat 731 days of the last 1826 days you owned it, counting backwards from the closing date on the HUD-1 statement you will receive at the closing when you sell it, then you qualify for the capital gains tax exclusion. Those 731 days do not have to be consecutive either, so long as all of them are in the last 1826 days you owned it. One day short, and you don't qualify.
@Carl He has "Nonqualified Use", so he can only exclude PART of the gain.
@jeffo45 If it was your Principal Residence for 732 days out of 1915 days of ownership (about 5 years, 3 months), not counting the gain from the depreciation, only 38.2% (732 divided by 1915) of the Gain can be excluded. So the other 61.8% of the Gain is taxable, plus the depreciation.
Thanks @SweetieJean , I accidentally typed 762 into my equation, rather than 732. I'll correct my comment above.
Bill, is the non qualified use due to renting the home before I lived in it or renting multiple times?
It is from renting it before you lived in it.
This doesn't apply to you, but for any future readers of this thread, Nonqualified Use only happens for rental periods (or any other time period when it was not your Principal Residence) after 2008. Periods before 2009 do not count towards Nonqualified Use.
One more clarification for any future readers of this post: Let's say you now rented it out for another 100 days, then sold it. That extra 100 days is NOT Nonqualified Use because you did not live in it afterwards. So in that hypothetical situation, you would use 832 days of use, divided by 2015 days of ownership, and be able to exclude 41.3% of the Gain (not counting depreciation).
Of course in that situation, you might not even meet the 2 year rule, in which case you wouldn't be able to exclude any of the gain.
So the one year period I rented the home after I purchased it and before I moved into it causes me to lose the exemption due to this being unqualified use? Also with the calculation going out past 925 days from the date of purchase is not inside the last five years...confusing
The Exclusion is meant for homes that are your Principal Residence. The Nonqualified Use rule basically prorates the exclusion so it only applies to the time it was your Principal Residence.
Yes, there is a bit of a 'loophole' that if you rent it out AFTER you live in it (and DON'T move back in), it avoids the Nonqualified Use rule. But the general rule is that it is meant to only exclude the gain based on the time it was your Principal Residence.
After looking at the rules again, I have another question: WHY did you move back and forth?
OK. So say I keep it as my residence for a contiguous two year period from the last time I moved in would that be also non-qualified? Should I rent it for 6 months then sell it to get this loophole?
I purchased the home while living overseas. The person who was living in it continued living in the home as my tenant until I was ready to move into it, basically 11 months. Living in the home as my residence and leaving was not planned but it happened and due to security issues in the country where I was transitioning back and forth from it just worked out that way. I am getting the 732 days by adding up the personal use days on schedule E. This was intended in every way to be my main residence.
Renting it out for 6 months now would make those 6 month qualified use, but it would NOT change any previous Nonqualified Use.
You can't get out of the fact that those first 11 months were Nonqualified Use.
For the other rental period, it is POSSIBLE it could qualify for qualified use. This provision makes a period NOT Nonqualified Use: "period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the Secretary"
So depending on EXACTLY why you rented it for that second time, it is POSSIBLE that you had "unforeseen circumstances as may be specified by the Secretary". *IF* that is the case, that second rental period would NOT be Nonqualified Use. Only the first rental period would be Nonqualified Use. *IF* you think that COULD be the case, you may want to go to an experienced tax professional to research if your circumstances would qualify as "unforeseen circumstances as may be specified by the Secretary".
Yes I read that and it is loosely defined. Not to put personal information on a public forum but I could probably justify the reason why I rented it out the second time. I did talk to a 'tax preparer' at one time and mentioned the adding of the total time that I will have resided in the home as my primary residence. FYI the reason for the initial rental period before taking occupancy was while waiting for my wife's spousal visa which took over a one year. Complicated to say the very least
The second period doesn't need to be "justified", it needs to be a situation "specified by the Secretary". In other words, there needs to be official guidance from the Department of Treasury or IRS saying that situation qualifies.
If your gain is large, it may be worthwhile going to a tax professional. When interviewing who to go to, you should specify that they may need to do research for situations that qualify as "Nonqualified Use", for purposes of the Section 121 Home Sale Exclusion.
If you were AD/MIL during that time, there are exceptions that allow you to "suspend" the 5 year lookback, which can make the total lookback time up to 10 years (keeping the 2008/2009 "line in the sand" in mind). So if you are/were AD/MIL, select YES when asked if you lived in it as your primary residence and work it through. Read the small print, as it will matter.
All this for renting to the person who resided in the home before I bought it and occupied it for myself. Rental income was insignificant compared to the taxable income I would have to pay. If I decide to lease the home again and then live in it yet one more time I will never be able to shake the initial fact or the first rental before living in the home.
Just to clarify: It is not the fact that it was rented first. ANYTIME that you move into a home after it was rented would create Nonqualified Use. So even if you had originally used it as your residence, then rented it out, then used it as your residence again, there would be Nonqualified Used and the exclusion would be prorated.
If you rent it out again and then move back into it, you will be adding more Nonqualified Use.