Primary Residence, Renting & Capital Gains Quandry

[Heatheresq525]

I purchased a home in New York City in 2015 and lived continuously there until 2019.  I relocated to a rental property in Washington state in 2020 and have live there (renting only) since then.  I continued to own my NY property and it has generally remained empty without tenants/rental income.  I have intermittently stayed at my NYC apartment since 2020, visiting generally for 1-2 weeks, but sometimes stretching for 6-8 weeks.  I never purchased property in WA.  Am I ineligible for capital gains if I sell my NYC property in 2024, having not physically lived there or paid income taxes in NY state since 2019?  I assume I am ineligible, but wanted some community expertise given that I have not owned another home in the interim.  Thanks!

[Mike9241]

you're correct. you don't qualify for the home sale exclusion so you'll owe Federal taxes on the entire gain. Because the property is located in NYC you'll owe NY and NYC income taxes. Washington state has a capital gains tax but it exempts real estate so there will be no tax. 

[NCperson]

@Heatheresq525 To be eligible for the capital gains exclusion, you must have owned AND lived in the property for 2 of the last 5 years, looking back on the day of the sale.  

As you point out, you meet the ownership requirement, but not the "lived in" requirement, so you are not eligible for the capital gains exclusion. 

[Opus 17]

To exclude your gain, you must have lived in the home as your main home for at least two of the past five years prior to the date of the sale. Two years means 730 days. The days do not have to be consecutive, but the time that you used the home as your main home must add up to 730 days out of the past 5 years.

Otherwise, the capital gains are fully taxable.  You will also owe NY state and city taxes on the gain (but not your other income) on a New York non-resident tax return.   When you prepare the nonresident tax return, TurboTax will ask you to manually allocate all of your income sources to the different states. Pay attention to the allocation, because TurboTax can’t guess for you.  You don’t want to accidentally pay NY tax on non-NY income.