Generally, a homeowner must own and live in the home for two out of the last five years to qualify for the $250,000 ($500,000 if filing a joint return) exclusion for capital gain on the sale of a primary residence. However, there is an exception to the two-year rule for tax payers who sold early for a job-related move. You meet the standard requirements if any of the following happened during the time you owned and lived in the home you sold:
If you meet this and the other requirements for the capital gains exclusion, you're entitled to a percentage (in your case, 75%) of the exclusion amount.
Please follow this link for more information. https://www.irs.gov/uac/about-publication-523
Could you please confirm this is the case also for US citizens living abroad and selling a foreign primary residence?
@Davidt522 wrote:
Could you please confirm this is the case also for US citizens living abroad and selling a foreign primary residence?
Nothing in the Internal Revenue Code nor Treasury Regulations relating to the Section 121 home sale exclusion requires that your principal residence be located within the United States in order to qualify for the exclusion.
What if you have owned the home for 10 years, lived in it for the first 7, relocated due to job and rented it out for 3 years and 2 months before selling, can you still get a pro rated exclusion?
can you still get a pro rated exclusion?
No. Since you did not sell the home within a reasonable time after your move, but intsead converted it to rental use (which is a form of business use), you don't meet any of the above criteria at all - not even for a partial exclusion.
If the property was your primary residence for at least 730 days of the last 1826 days you owned it, then you qualify. The look back day count starts from the closing date of the sale.
@djfunk wrote:
What if you have owned the home for 10 years, lived in it for the first 7, relocated due to job and rented it out for 3 years and 2 months before selling, can you still get a pro rated exclusion?
You can suspend the 3 year rule for up to 10 years if the reason you moved out was due to military or foreign service orders. For any other reason, keeping it as a rental for more than 3 years kills the exclusion.
@djfunk wrote:What if you have owned the home for 10 years, lived in it for the first 7, relocated due to job and rented it out for 3 years and 2 months before selling, can you still get a pro rated exclusion?
Yes, you can use the Reduced Maximum Exclusion if the circumstances of your job change while the house was your Principal Residence (assuming you meet the rules about the job change, such as the 50 mile rule).
https://www.law.cornell.edu/cfr/text/26/1.121-3
@AmeliesUncle wrote:
@djfunk wrote:
What if you have owned the home for 10 years, lived in it for the first 7, relocated due to job and rented it out for 3 years and 2 months before selling, can you still get a pro rated exclusion?
Yes, you can use the Reduced Maximum Exclusion if the circumstances of your job change while the house was your Principal Residence (assuming you meet the rules about the job change, such as the 50 mile rule).
https://www.law.cornell.edu/cfr/text/26/1.121-3
No. That section applies to people who move out early, after less than 2 years of ownership. It does not apply to people who move out late, after the expiration of the 3 year grace period.
Even if you tried to assert that 121.1-3(a) applied to both the 2 year ownership/residency rule and the 3 year grace period, you would be defeated by b(1) and b(4), "The sale or exchange and the circumstances giving rise to the sale or exchange are proximate in time;" and "The taxpayer uses the property as the taxpayer's residence during the period of the taxpayer's ownership of the property;" The sale (38 months after the job change) is not proximate in time to the job change and the taxpayer was not using the home as their main home.
@Opus 17 wrote:No. That section applies to people who move out early, after less than 2 years of ownership. It does not apply to people who move out late, after the expiration of the 3 year grace period.
but fails to satisfy the ownership and use requirements described in § 1.121-1(a) and (c) or the 2-year limitation described in § 1.121-2(b)
Where do you see that? It says it applies to those who do not meed the 2/5 rule (or the 2-per-year rule). That applies to this situation.
@Opus 17 wrote:
you would be defeated by b(1) and b(4), "The sale or exchange and the circumstances giving rise to the sale or exchange are proximate in time;" and "The taxpayer uses the property as the taxpayer's residence during the period of the taxpayer's ownership of the property;" The sale (38 months after the job change) is not proximate in time to the job change and the taxpayer was not using the home as their main home.
If a safe harbor described in this section applies, a sale or exchange is deemed to be by reason of a change in place of employment, health, or unforeseen circumstances.
If a safe harbor described in this section does not apply, a sale or exchange is by reason of a change in place of employment, health, or unforeseen circumstances only if the primary reason ...
The Safe Harbor overrides (1) and (4). Those only come into play if the Safe Harbor does not apply.
I've simply never heard of the reduced exclusion amount applying to the 3 year grace period, and none of the examples in the code section apply to the 3 year period, they all apply only to the 2 year ownership rule. Maybe this is a case where the law is more open ended and the IRS only wants it thought of in a certain way so they encourage one way of thinking and discourage others. I'd like to see some other experts look at this.
Hello. My question regarding this is the grey area claiming "took a new job". I am under the 2 year on my primary and relocating. Technically I have not secured a job at my new area (1000 miles away) but I will when I get there.
My reason to move is also employment related. And unforeseeable events about living where my home was purchased. How can I clearly document my move for tax purposes.
@Maj92az wrote:
Hello. My question regarding this is the grey area claiming "took a new job". I am under the 2 year on my primary and relocating. Technically I have not secured a job at my new area (1000 miles away) but I will when I get there.
My reason to move is also employment related. And unforeseeable events about living where my home was purchased. How can I clearly document my move for tax purposes.
I don't think it's a gray area, if you move to change jobs, that qualifies for the reduced exclusion. It doesn't say you have to have a confirmed job before you move. (However, if you did sell, move, fail to get a job, and then move back to the original geographic area, then you would probably not qualify.)
I have a situation where I am unsure if we qualify for the reduced maximum exclusion.
My wife accepted a new job on February 1, 2020. We also signed for a new home on February 20, 2020 that is 90 miles away from her new job. Her old job was around 15 miles away. We only lived in the new home for one year and three months. We finally decided on relocating closer to her new job that is around 20 miles away. Given that she accepted her job before I moved in to our new home does that disqualify us from the reduced maximum exclusion? Does it matter if she accepted her new job before we moved in?
It may be possible to qualify for a partial exclusion.
See 2020 Publication 523, page 6 for more information about partial exclusions and page 7 for a Exclusion Limit Worksheet.
Hello,
Does this apply if you left your last job & opened a business that you work at that is 50 miles or more away? We have owned our home for 15 months.
Thank you
The rules are spelled out exactly in the publication previously mentioned. Did you read the entire discussion before you posted?
https://www.irs.gov/pub/irs-pdf/p523.pdf
You can qualify for a partial exclusion if you moved due to a "hardship". The IRS provides several specific definitions of qualifying hardships, so-called safe harbors. If you meet the exact rules in one of the safe harbors, you qualify. If you don't meet a safe harbor, you are not necessarily prevented from using the partial exclusion, but you will not receive the benefit of the doubt if audited and you will have to strongly prove your case.
The "moved for a job rule" says specifically this:
You took or were transferred to a new job in a work location at least 50 miles farther from the home than your old work location. For example, your old work location was 15 miles from the home and your new work location is 65 miles from the home.
So not merely 50 miles away, but 50 miles farther than the old job (making your commute 50 miles longer than it was before.)
I lived in my home in Idaho for 7 months and relocated to Texas for a new job. I made $125,000 gain not counting $12,000 remodel, $ 30,00 escrow fees and $3,000 moving fees. Will I have to pay capital gain?
@prouse54 wrote:
I lived in my home in Idaho for 7 months and relocated to Texas for a new job. I made $125,000 gain not counting $12,000 remodel, $ 30,00 escrow fees and $3,000 moving fees. Will I have to pay capital gain?
Yes. You need to review publication 523 to determine what your gain actually is.
https://www.irs.gov/pub/irs-pdf/p523.pdf
Your gain is the difference between the selling price and your adjusted cost basis. The remodel is probably an adjustment that increases your basis, so your gain might only be $113,000. Moving expenses are not tax deductible unless you are in the military, and they are never part of the capital gains calculation (they would be deducted on a different form if your are in the military). Certain closing costs can be used as adjustments to basis, you will need to look at the list in publication 523. Most of your escrow fees and closing costs are not basis adjustments.
If you are single or head of household (not filing as married filing jointly), your maximum capital gains exclusion is $250,000. Since you only lived in the home 7 months out of the 2 year or 24 month requirement, you can only exclude 7/24 of that amount. That's 29%, so 29% of $250,000 is $72,916. That means that after you determine your adjusted cost basis and know the actual gain amount, the first $72,916 is tax-free and anything over that is a short-term capital gain that will be taxed as ordinary income.
Turbotax will actually figure it to the day; you will need to give the date you bought the house, the date you sold it, the date you moved in, and the date you sold your previous house. The partial exclusion percentage is determined by the shortest time:
We are moving to Texas this month end and plan to sell the current primary residence after living here for nearly 26 months and we four (me my wife and my son and his wife ) jointly own as Joint Tenancy on the title in CA. However we also sold the previous property after living there for more than 4 years on 23rd December 2020. The current move and anticipated current property sale is because of job relocation of my son to Dalls TX. If we make capital gains out of the current property sale, can we exclude full amount allowed for capital gains upto $500,000 per couple or only partial exclusion is allowed and if so what is the formula? The move is from Fremont,CA to Plano,Texas. Since I am retired and on social security, will be moving along with my son and have been living with him for the past five years. Though we met the primary residence requirement but I need clarity regarding the effect of previous property sale within the last 24 months for capital gain exclusion amount.
Any advise would be appreciated.
Thanks
Venkatraman Gopalakrishnan
The answer is contained in publication 523 on page 6, under "Does Your Home Qualify for a Partial Exclusion of Gain?" https://www.irs.gov/pub/irs-pdf/p523.pdf
You fail the 2 year look-back rule to claim the full exclusion, because even though you lived in the home more than 2 years, you used the exclusion on the previous home only 9 months ago. Because you are moving for a job change of one of the co-owners, you would qualify for a partial exclusion.
The partial exclusion percentage is determined by the shortest time:
Turbotax will actually figure it to the day; you will need to give the date you bought the house, the date you sold it, the date you moved in, and the date you sold your previous house.
Note that since the home is co-owned by two married couples, the capital gains are reported 50/50 and each couple is entitled to a partial exclusion. Since you last used the exclusion 9 months ago, your partial exclusion will be approximately 9/24th, or 37.5% of the $500,000 limit, which is $187,500. Each couple would report half the cost basis, half the selling price, and half the capital gain.
Also note a couple of factors that will be peculiar to your situation.
1. The exclusion is calculated separately for each owner or married couple. You sold your previous home 9 months ago, so you fail the look-back test and only qualify for a partial exclusion now. However, suppose your son and his wife were not owners of that previous property and did not use their exclusion on a previous home in the past 2 years. They would qualify for a full exclusion on their half of the gain, while you qualify for a partial exclusion. On the other hand, if your son didn't move in with you until 5 months ago, they would only qualify for a 5/24ths exclusion on their half, or if your son moved out early to take the new job, he and his wife would get a smaller exclusion. This is all because the exclusion is figured separately based on each person's shortest period time of owned, lived in, or previous exclusion.
2. Suppose you have a very large exclusion on this home that is not covered by your partial exclusion limit, but you had a small gain on the sale of the previous home in 2020. You could declare this upcoming sale to be the sale you will use the full exclusion on, and then file an amended 2020 return to remove the exclusion and pay the gains tax on that prior sale.
My situation is similar. I have lived in my current home for 1.5 years. Now I got a new job offer in another state and decide to move there. But I would like to rent my current home for next 3 months (until Spring next year) when I decide to sell it. Would it disqualify me from using the exemption? Basically can I rent my home after job change at all before sale?
@suanlacai wrote:
My situation is similar. I have lived in my current home for 1.5 years. Now I got a new job offer in another state and decide to move there. But I would like to rent my current home for next 3 months (until Spring next year) when I decide to sell it. Would it disqualify me from using the exemption? Basically can I rent my home after job change at all before sale?
There is no requirement that you sell your home within a certain time of the life-event that qualified you for the partial exclusion. You could still claim the partial exclusion if you rent the home for a few months. I think you are more likely to have trouble finding a tenant if you tell them you plan to sell in just a few months. You would want to have any lease agreement reviewed by an attorney or real estate professional to make sure that having tenants does not get in the way of the sale.
you might have a problem finding a tenant willing to rent for only 3 months. most likely they would want a 1 year, maybe longer, or at least an option to renew. any purchaser of the property would likely be bound by the lease.