IRS Section 121 Exemption

[RCNorth]

Background:  Current NJ Home purchased in 1987 with Gain Postponed from sale of a prior home.  Second Home purchased in Florida in 2009.  From 2018 to 2023, have spent seven months per year in Florida but have maintained NJ residency (i.e., Driver's License, Voting, Tax Returns, etc.).  Intend to declare and fulfill requirements for Florida Domicile and Residency as of January 1, 2024.

Question:  By when must I sell my current NJ Home in order to maintain and utilize the IRS Section 121 Exemption?

     a.  January 1, 2024?  Effective this date the NJ Home is no longer the Main Home.

     b.  February 1, 2024?  This is the latest date as of which I was physically in the NJ Home for 24 months in the last five years.

     c.  January 1, 2027:  This is the latest date as of which the NJ Home was a Main Home for 24 months in the last five years.

I have already been advised that I cannot move the IRS Section 121 Exemption to my Florida Home as the Gain Postponed was related to the current NJ Home.  Thus, all focus is now on the timing of declaring Florida residency and sale of the NJ Home.  Losing the IRS Section 121 Exemption would be extremely painful, financially.

Thank you in advance for any guidance you can offer.

[Bsch4477]

See prior replies. 

[Mike9241]

here's what the Regulations say as to use which both you and your spouse must satisfy for the full $500K exemption

(c) Ownership and use requirements—(1) In general. The requirements of ownership and use for periods aggregating 2 years or more may be satisfied by establishing ownership and use for 24 full months or for 730 days (365 × 2). The requirements of ownership and use may be satisfied during nonconcurrent periods if both the ownership and use tests are met during the 5-year period ending on the date of the sale or exchange.

(i) In establishing whether a taxpayer has satisfied the 2-year use requirement, occupancy of the residence is required. However, short temporary absences, such as for vacation or other seasonal absence (although accompanied with rental of the residence), are counted as periods of use.

It would seem February 2024 is irrelevant becuase it apparently ceased to be your principal residence in January 2024

so while you could close on 1/1/2027 waiting to the last momnent is foolish and would cost you big time if the closing fell through which does happen.   what do you plan to do with the NJ property for the 3 years after you move out? rent it? then you must take deprecition and any gain allocable to deprecition can't be exclusded and is subject to section 1250 recapture. then you also might have to deal with a tensant that refuses to move out on a timely basis which can mess up closing. this too has happened.  Eviction can take months. what I'm suggesting is that you sell and close well before the deadline.

[NCperson]

something else to consider....... and I'd ask others to weigh in....

Can you meet the 'use' test as part of Eligiblity test given you are already living 7 months of the year in Florida and have been doing so since 2018?   look at page 3 under "Eligibility test" (right side): 

"If you were ever away from home, you need to determine whether that time counts toward your residence
requirement. A vacation or other short absence counts as time you lived at home (even if you rented out your home while you were gone)."

https://www.irs.gov/pub/irs-pdf/p523.pdf

Does a seven months of the year in FL constitute a 'short absence' from the NJ home? I am not a lawyer, but my common sense brain says seven months being absent out of the year doesn't constitute a 'short absence'.  And if that is the case, how can you pass the 24 months of the last 5 year residency test? 

Let's say I have a point.  So from 2018 - 2022 (5 years), you spent 25 months in NJ.  That achieves the desired result since the residency use test doesn't have to be consecutive.  And for simplicity of this example, let's assume that the 1st 5 months of the year are in NJ and the last 7 months are in FL. 

On June 1, 2023, you move to FL for the last 7 months of the year and have no further intent on moving back to NJ.  Now let's go to January 1, 2024, there are still 25 months in NJ and 35 in FL over the past 5 years.  But on February 1, 2024, there are 24 months in NJ and 36 in Florida over the past 5 years.  And on March 1, 2024, there are only 23 months in NJ and 37 months in FLorida over the past 5 years - the use test fails! 

So doesn't the home really have to be sold by February 1, 2024?  (or you need to stay in NJ for additional months to protect the 24 month clock?)

Encourges others to weigh in..... have you asked a tax lawyer in NJ whether that is an issue (as I suspect there are a number of NJ residents snow-birding to FL, so this is not a unique situation).

the whole question is avoided by selling the home prior to February 1, 2024 and not getting into the argument what constitutes 'short term absence'.; for the amount of money involved, why take the risk of being wrong? 

[Mike9241]

@RCNorth you may want to read this thread.  if you're spending 7 months of every year in FL that would likely be your principal residence not NJ.  I too would find it difficult to view 7 months as a temporary absence. Do contact a pro in NJ for their viewpoint  

https://www.investopedia.com/terms/p/principalresidence.asp 

[NCperson]

@Mike9241 - thanks for the link.  

From the link: 

"If the taxpayer maintains more than one residence and divides their time on a seasonal basis between those residences, the dwelling in which they spend more time would qualify as their principal residence."

the link references the same document and page as I referenced above, 

What this means to me is the OP doesn't currently qualify for the capital gains exclusion on the NJ home. 

[RCNorth]

First, my thanks to all those who replied.

Second, I believe that the definition of Main Home is NOT strictly defined by time spent but as shown in Publication 523:  

"If you own or live in more than one home, then you must apply a "facts and circumstances" test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well. They are listed below. The more of these factors that are true of a home, the more likely that it is your main home.   

• The address listed on your:

  1. U.S. Postal Service address,

  2. Voter Registration Card,

  3. Federal and state tax returns, and

  4. Driver's license or car registration."

  I would like to hear what others think of this as a way to meet the Main Home as being a residence for more than 730 days in the last 5 years before sale, together with the "facts and circumstances.

[NCperson]

@RCNorth -

The challenge I suspect you are going to have is that while the IRS permts you to apply the "facts and circumstances" to the equation, I do not see where it permits you to dismiss the 730 days of residency in a 5 year period and rest solely on the facts and circumstances.  The IRS states "the most important factor is where you spend the most time" .  The fact that you only spend 5 months of year in what you claim to be your 'main residence' is the challenge to the IRS requirements.. 

This article also spells out the challenges. It is not cut and dry.

https://www.taxaudit.com/tax-audit-blog/how-does-the-irs-define-primary-residence

my recommndation, and those of others on this thread, is to seek local tax advice from a professional.  Debating with us won't satisfy the IRS if it comes to that.  And we are anonymous to you.  

For the amount of money at risk, and the "fire" you are playing with, please do yourself a favor and and spend  a few bucks with a local tax attorney that you can trust.  It will be money well spent. 

[RCNorth]

Thank you @NCperson for the sage advice to seek professional advice and to consider avoiding "playing with fire".

Alas, given the desire of the IRS to squeeze every nickel from the taxpayers, they would likely interpret all rules to their own favor when dealing with me, even if they allowed others a different answer!! 🙂