Partial exemption question?

[Anonymous]

So I bought a home in 2013. Lived in it for about a year before I moved (>50 mi) for a new job and thus started renting it out as an investment.Then I sold it in 2017. I know you can claim an exemption and not pay the capital gains tax if u lived in it for 2/5 years u owned but can I still get a partial exemption being i used it as a rental property being selling it and since I didn’t own it for 5 years? 

[Hal_Al]

No. Although a job change can be an exception to the 2/5 rule, allowing for a partial exclusion,  "A partial home sale tax exclusion is ordinarily limited to the percentage of the two years up to the date of the sale that you owned and occupied the home as your principal residence".
Reference: <a rel="nofollow" target="_blank" href="http://www.nolo.com/legal-encyclopedia/the-partial-home-sale-tax-exclusion-irs-approved-unforeseen-c...>

[Carl]

With few exceptions, (and yes, there are some) only military/DOD  personnel who were moved under official orders can qualify for a partial exemption anyway. But even those folks don't qualify if they don't have at least 2 years of ownership.

[SweetieJean]

@Carl OP did own it for 4 years. And can you cite the military orders only rule?  That's not my understanding.

[Anonymous]

So if I bought the home in March 2013, started renting out in March 2014 and sold in June 2017. Where does that leave me? No partial exemption even though I started renting out due to a job relocation? My initial understanding is since I lived in it for a year I could exclude up to 50% on capital gains?

[Carl]

I did not say there was any such thing as a military only rule. Read my first sentence above, and pay attention to what's in parenthesis. The exception is used most commonly by active duty military. But it's not exclusive to the military, or any other group for that matter.

[Carl]

Once key thing I note is the reason you started renting it out. "due to job relocation". Sounds like one of the requirements for partial exemption to me.

[Hal_Al]

Somebody who had lived in a house over two years but waited over 3 years, after moving out, to sell it would not qualify under the 2/5 rule for an exemption. It makes no sense for someone who live in the house less than two years and waited over 3 years to sell it to get a partial exemption, just because he had a 50 mile job change. The three year gap (Mar 2014 to Jun 2017) disqualifies him. In addition, there's the two year rule for a partial exemption. Reference: <a rel="nofollow" target="_blank" href="http://www.nolo.com/legal-encyclopedia/the-partial-home-sale-tax-exclusion-irs-approved-unforeseen-c...>

[SweetieJean]

@Hal_Al  While I agree with your thoughts, I do not see anything in the law that forbids this. What if OP was unable to sell the home, so rented it out instead? I could find nothing citing how soon he had to sell..

[TaxGuyBill · Accepted solution]

Yes, it sounds like you qualify for the Partial Exclusion (assuming you have not excluded another home in the last 2 years).

That link from Nolo is poorly phrased, or even outright wrong (like several other Nolo articles I've seen).

The reduce maximum exclusion is prorated on time you lived in it versus a 2 year (24 month or 730 days) basis, but it is still based on the 5 year lookback period.

https://www.law.cornell.edu/cfr/text/26/1.121-3#g

I agree that it doesn't make sense to allow an exclusion after renting it out for 3 years, but the "safe harbor" allows it (in the past I had misread the rules, but the "safe harbor" overrides the other rules).

[SweetieJean]

That's  my read as well.

[Anonymous]

Okay. Yeah I moved from one part of the state to another part due to a job transfer. But decided not to sell since I felt the market wasn’t right at the time hence the 3 year gap. Thanks everyone for the clarifications!!!

[SweetieJean]

https://ttlc.intuit.com/questions/3028356-capital-gains-question-i-see-that-job-relocation-is-an-exc...