Home sale Look back requirement

[rcdwyo11]

Question:  How/when is the two year period established on second home sale under the home sale exemption? PUB 523

Example: If  we sell/close on our home in Germany on March of 2023 and have a 450K gain on a home we  owned for more than 10 years and have lived in as our primary residence for the past 3 years.  We file German taxes and have no tax bill for the home, and we file US taxes and take the home ownership exclusion on 2023 US taxes.  We then move home to our home in the April 2023 that we have owned for 12 years.  When does the two year eligibility period on the sale on our US home start?  As I read the tax code the two year period would start in April 2023 and would be met in April/May of 2025?  is this correct

[NCperson]

@rcdwyo11 correct.  you would need to live in that US home for two years to meet the last 2 of 5 rule.   But you can't take the exclusion more frequently that once every two years.  

So you would meet the requirement the LATER OF a) 730 days (two years) after you sold the German home or b) 730 days (two years) after you moved into the US home.  

what did you do with the US home while you lived in Germany?  rent it out? there are some complex rules if you lived in, rented, lived in that US home....

[rcdwyo11]

Thank you for your response.  Follow up questions.  Does the 730 day rule starts the day I return to the US/check out of Germany or the day after I sold the home in Germany?

We did nothing with our home in the US during the time in Germany.  we used it like a vacation home, we did not rent it but we did stay in for about 80 to 90 days a year.  We return about every 4 months or so.  

Thanks

[NCperson]

it begins the day you call the US home your personal residence, which has to be after the Germany home is sold. 

[AmeliesUncle]

---

@rcdwyo11 wrote:

a 450K gain on a home we  owned for more than 10 years and have lived in as our primary residence for the past 3 years. 

that we have owned for 12 years.  When does the two year 

---

You aren't asking this, but it sounds like you may have (and/or will have) "Nonqualified Use". That means part of it will be taxable.

For the first home, if it was your Primary Residence for only 3 years out of a total 10 of years of ownership, you can only exclude 3/10ths of the gain.  The other 7/10ths of the gain will be taxable.  If it was your Principal Residence the entire time of ownership, then you may exclude 100% of the gain (up to the $250,000/$500,000 maximum).

For the second home, if it will be your Principal Residence for 2 years out of a total of 14 years of ownership, you can only excluded 2/14ths of the gain.  The other 12/14ths will be taxable.  The time before it was your Principal Residence can not qualify for the exclusion.

[pk]

@rcdwyo11  generally agreeing with answers from my colleagues @AmeliesUncle  & @NCperson ,  just wanted to be  sure that I am understanding the situation correctly :

The rules for  excluding  capital gain ( from US taxes ) from alienation of a main residence :

 with a look back period of Five years from  the date of consummation of sale:

               1. At least one of a joint filer must have owned the property for two years

                2. The filers must have used the property as his/her/joint Main Residence for 730 total days

                3. Neither filer  must have taken advantage of this  exclusion  in the last two years

 Thus if  the asset is sold in  Germany  on Say  April 30th of 2023, then  the next window of opportunity to sell would be two year from that closing date i.e.  May 1st of 2025  ( assuming full 24 hr. days  and excluding the actual day of alienation )

 The new sale ( the US prop. also will have to meet the  2 + 2 requirement ) -- so if you moved into the US asset  and started using as  your  main residence on  May 2nd ,  2023  your  exclusion eligible sale cannot occur before   May 3rd. 2025 ( again counting full 24  hr. days ).  I am assuming here that the ownership clause/requirement is met in both case.

Does this make sense  pr am I in the left field  again  ?

pk

[rcdwyo11]

Thank you all.  I understand, 

[Opus 17]

You will only be able to exclude part of your gain, even if you wait a full 2 years before selling the US home.  This is called "non-qualified use".  It's not explained well verbally in current IRS instructions, but the calculation is shown in Worksheet 3 of IRA publication 523.  Print out a copy and work through it to see the result.

Publication 523 PDF

Very briefly, if you move out of your main home for a time, then move back in for 2 years and sell, the time you were away does not count toward the exclusion.    Suppose you bought the home in 2012, moved out in 2020, moved back in 2023 (I mean using it as your "main home"), and sell in 2025.  You owned for 13 years but 3 years is "non-qualified" for the exclusion.  As a result, 3/13th of your gain is not eligible for the exclusion and you will pay capital gains tax on it.  The other 10/13ths is qualified, and you can exclude up to $250,000 of the gain (or $500,000 if married filing jointly) and then you pay capital gains tax on any gain over that amount.

[pk]

@rcdwyo11 , what my colleagues are referring to  is  delineated in section 121  - 5. (A) and (B) and exceptions thereto  in C.

What the IRS is getting at  is that during the non-qualified use of the property ( ownership test met but not  use test )  the FMV has gone up ( assumed ) and  because it was  neither an income property  nor  main residence, the  final gain  after  qualified use must be allocated between  non-qualified use and qualified use periods , thus assuming a straight line gain ( may or may not be factual though ).  Post this limitation ( unless you meet the exceptions called out in section 121  - 5. (C) 

To find a way around this limitation  ( if applicable to you ) , you may want to consult a Tax attorney / CPA and EA.

I have not searched  for case law on this .

Here is a ref to the statute  -->

26 U.S. Code § 121 - Exclusion of gain from sale of principal residence | U.S. Code | US Law | LII /....

 The only reason I go back to the statute is because while IRS publishes all the pubs., there is always a jurat saying in case  of conflict  between  the pub and the statute, the statute is  dominant.

[Opus 17]

@pk 

You seem to be suggesting that if the home did not gain value during the period of non-qualified use, there might be a way to allocate the gain only to the period of qualified use.  I don't think the wording of the statute leaves wiggle room to interpret the gain during the non-qualified period as anything other than proportional to the length of the non-qualified use.

(B) Gain allocated to periods of nonqualified use. For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—

(i) the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to

(ii) the period such property was owned by the taxpayer.

[pk]

@Opus 17 , sorry for the  confusion ---- I was only explaining   why I think the section 121  is forcing an allocation of gain to  period of non-qualified use.    I see this as an over-reach of the law  because it puts  the  owners  whom  multiple properties  , do not use these as income property and  then dispose of the  properties one by one every two years at a disadvantage   as opposed to  those whom bought a property, used a qualified property, disposed  ,  excluded the gain and then bought again .  If the  section 121 did not  require allocation of gains, then both paths would have  resulted  in the same benefit to the taxpayer.

But obviously ,  law is the law .

pk

Beg your pardon for leaving the wrong impression .

[Opus 17]

@pk 

Unfortunately, we should not expect Congress to be kind or thoughtful when writing tax laws. 

[pk]

@Opus 17 😊