If you have a US primary residence and a EU secondary residence,is it possible to switch primary residency to the EU home in order to avoid capital gain tax if selling?

[hindman203]

I spend 5 months a year in my EU home.  I have owned it for 20+ years, and have never rented it.  If I'm looking to sell in 5 years, I would like to avoid paying any US taxes on the sale.  I would appreciate any advice.

[MaryK4]

If you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live.  You may be able to get a foreign tax credit if you pay taxes in the location of the property.

[hindman203]

Hi Mary,

Thanks.  That answer I already knew.  I'm more looking for options for the future sale of the EU home, that give me a clear view of taxation from a US perspective.  My US home is currently my primary residence.  I spend 5 months in the EU home every year, but could spend more if making it my primary residence helps, and if I need to spend 2 years of last 5 there.

 I was hoping to find someone who knows the best plan tax wise in selling the EU home in the future.   I know what the local laws/rules are, as well as the US rules on sale of a primary residence, but it's not clear when you have a US primary residence and an EU secondary residence.   I am a US citizen and and EU resident.  Neither home is rented.  Is It a solution to switch residency for say 3 years or 5 years, then sell the EU home for example?  Or is there another strategy?  I'm not in a hurry, so I'm looking for solutions to minimize taxes.

Thanks.  

[DavidD66 · Accepted solution]

A principal residence abroad is any property you have lived in for at least two of the last five. When you sell your principal residence, you are eligible for a gain exclusion of $250,000 USD, or $500,000 USD for married principal owners. If you don’t qualify for the gain exclusion, any gain will be considered foreign income and thus eligible for the Foreign Tax Credit. This income is not considered foreign earned income and will not qualify for the Foreign Income Exclusion.  

According to IRS Publication 523:

If you own and live in just one home, then that property is your main home. 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:

• U.S. Postal Service address,
• Voter Registration Card,
• Federal and state tax returns, and
• Driver's license or car registration.

The home is near:

• Where you work,
• Where you bank,
• The residence of one or more family members, and
• Recreational clubs or religious organizations of which you are a member.

[Carl]

Basically, there are five "eligibility requirements" that must be met. You can review each requirement and the details of each requirement in IRS publication 523 at https://www.irs.gov/pub/irs-pdf/p523.pdf  The individual requirements with details start on page 3 under the heading "Eligibility Test".

[AmeliesUncle]

You can make it your Principal Residence and likely qualify for an exclusion.  However, because it was not always your main home, the exclusion will be prorated.  So you won't be able to exclude all of the gain; part of it will be taxable.

[hindman203]

Thanks David,

This was very helpful.  

If I apply the "facts and circumstances" test, it's almost identical if I answer those items in the list.  For example, we both have a US Postal address and an EU Postal address; my wife votes in the 2 places, me only the US; Fed and State we pay in the US; we have no income from the EU country, but do pay property taxes there and here; we have driver's licenses in both countries; car and car registrations in both; banking in both, residency of family in both; recreation clubs in both.  

We are growing older, and are looking ahead to execute the transaction in say 5 years, while we are of sound mind.  We have owned the home for decades, know the local laws and contacts, and don't want to burden our  grown children who live and work in the US, with the task of selling, as it is complicated and lots of potential to be taken advantage of, especially if done remotely.

Would you say, given the answers above, that we could qualify for using the EU home as a primary residence if we spend 30 months of the 60 months preceding the sale in the EU home?

Thanks in advance! 

[DaveF1006 · Accepted solution]

Yes, since the ownership/use requires you to live in the house for 2 years (24 months), living in it for 30 months will qualify your EU home as a primary residence.

@hindman203 

[pk]

@hindman203 , while agreeing with @DaveF1006  , just wanted to clarify that the ownership requirement is  2 years by either spouse/ filer, Use requirement is 730 days  ( for each spouse / filer ) total with a look back of five years from the day of sale/transfer completion ( in the use it is closing and not registration which is usually a short time later ).   And you must not have taken this gain exclusion in the last two years.

Does that make sense ?.

[hindman203]

Hi pk,

Yes, thanks !

[hindman203]

Hi AmeliesUncle,

Thanks for the post.  Can you elaborate more?  Where does the prorated piece apply?  In looking at pub. 523, and living 2 years of the past 5 in the home as a primary residence, the worksheet results concluded that a $500,000 exclusion was inline with our case.  What am I missing?  Is there another form?

Thanks in advance.

[AmeliesUncle · Accepted solution]

When the IRS revised Publication 523 a number of years ago, they messed up the explanation it so it is difficult to understand using the current Publication.  But TurboTax will walk you through it (but read the screen very carefully).

It is more complicated than this, but here is a simplified explanation:  Let's say you own the home for 10 years, the first 6 years was NOT your Principal Residence, then the last 4 years it WAS your Principal Residence.  In that scenario, only 4/10ths of your profit is eligible for the tax-free exclusion.  The other 6/10ths would not qualify.  But it is a bit more complicated than that

Another thing to consider:  In my example above, that home was your Principal Residence for 4 years.  That means your US Residence was NOT your Principal Residence for those 4 years, and that will need to be factored in if/when you eventually sell the US Residence.

As I said, the current Publication 523 makes it unclear, but here is a link to an older version that is easier to understand.  Look at "Nonqualified Use" on page 15.

https://www.irs.gov/pub/irs-prior/p523--2012.pdf#page=15

[hindman203]

Hi AmeliesUncle,

Thanks for that!  I really appreciate you pointing this out!  As you stated, it was not evident in the current pub. 523.  A couple questions.....

1). In the 2012 version of pub 523, it states under Nonqualified Use:  "Nonqualified use means any period in 2009 or later where neither you nor your spouse (or your former spouse) used the property as a main home". Now, in reality, for 5 months each year we do use the EU home as our main home, while our US home is empty, but what they are describing is the "main home" for the entire year I guess, correct?

2). From what you said, it sounds like I could use TurboTax to do a "what if" run of the sale of the EU home to see what the rules are and see what the outcome would be, correct?

Lastly, good heads up on the impact to the US home sale in the future.. 

Thanks! 

[DaveF1006]

This s a revision from my earlier post. I used publication 523 as a reference source that never mentioned the term main home or principal residence. 

Publication 701 does offer a clearer explanation on the ownership and use test and does specify main home as the residence that is eligible for the exclusion thus this does align with what PK mentioned.

Based on this, your European home would not qualify for the capital gains exclusion thus I apologize for my earlier advice.

{Edited 03/02/2022} 1:36 PM PST} @hindman203

[AmeliesUncle]

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@DaveF1006 wrote:

Publication 523 states that "If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time".  It doesn't say main residence just residence.

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As I pointed out the revised Publication 523 is horrible.  The law CLEARLY says it must be your PRINCIPAL Residence.  Please don't be advising people that it doesn't need to be their Principal Residence.