Look Back requirement

[Teresa0]

I have a question about capital gains tax. July 2017 we bought a home and sold it May 2018 but did not gain anything on the sale (actually lost money). May 2018 we purchased another home and sold it in April 2020 for a profit after we remodeled it. We moved because my husband relocated to another state for his job. My question is do we qualify for the look back exemption? This is all new to me and would appreciate any help I can get:) I did file the sale of the home on my 2018 taxes.

Thanks

[DaveF1006]

According to this IRS publication, you meet the requirements for a partial exclusion if any of the following events occurred during your time of ownership and residence in the home.

• 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.

• You had no previous work location and you began a new job at least 50 miles from the home.

• Either of the above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

Also the publication mentions, If you didn't sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn't take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period. In your case, you sold your second home 4/20 and your previous home 05/18. This is under the two-year period thus does not meet the two-year  look-back requirement.

[Teresa0]

Okay, thanks for the answer. Another question maybe you can help. How does the capital gains tax work? Are you taxed a percentage on the amount of gain or is it the total gain you have to pay? Our gain is only about $5500.00 but when I entered the amount it changed my refund from +2750 to -1371. I saw the on the tax rates and our income does not exceed $80,000 which is set at 0%.

Thanks

[Teresa0]

I also saw this article on another website. Very confusing, but according to this it looks like we would qualify.

• Look-back — You may take the home sale exclusion only once during a two-year period. If you excluded the capital gain generated by the sale of another home during the two-year period before the sale date (closing date) of the current home, you cannot exclude the gain on this sale.

Again, no profit was made from the first home sale.

Thanks

[RayW7]

In most cases, your home is exempt

The single biggest asset many people have is their home, and depending on the real estate market, a homeowner might realize a huge capital gain on a sale. The good news is that the tax code allows you to exclude some or all of such a gain from capital gains tax, as long as you meet three conditions:

1. You owned the home for a total of at least two years in the five-year period before the sale.
2. You used the home as your primary residence for a total of at least two years in that same five-year period.
3. You haven't excluded the gain from another home sale in the two-year period before the sale.

If you meet these conditions, you can exclude up to $250,000 of your gain if you're single, $500,000 if you're married filing jointly.

Length of ownership matters

If you sell an asset after owning it for more than a year, any gain you have is a "long-term" capital gain. If you sell an asset you've owned for a year or less, though, it's a "short-term" capital gain. How much your gain is taxed depends on how long you owned the asset before selling.

• The tax bite from short-term gains is significantly larger than that from long-term gains - typically 10-20% higher.
• This difference in tax treatment is one of the advantages a "buy-and-hold" investment strategy has over a strategy that involves frequent buying and selling, as in day trading.
• People in the lowest tax brackets usually don't have to pay any tax on long-term capital gains. The difference between short and long term, then, can literally be the difference between taxes and no taxes.

Capital losses can offset capital gains

As anyone with much investment experience can tell you, things don't always go up in value. They go down, too. If you sell something for less than its basis, you have a capital loss. Capital losses from investments—but not from the sale of personal property—can be used to offset capital gains.

• If you have $50,000 in long-term gains from the sale of one stock, but $20,000 in long-term losses from the sale of another, then you may only be taxed on $30,000 worth of long-term capital gains.
  • $50,000 - $20,000 = $30,000 long-term capital gains

If capital losses exceed capital gains, you may be able to use the loss to offset up to $3,000 of other income. If you have more than $3,000 in excess capital losses, the amount over $3,000 can be carried forward to future years to offset capital gains or income in those years.

You typically do not benefit from any special tax rate on short-term capital gains. Instead, these profits are usually taxed at the same rate as your ordinary income. This tax rate is based on your income and filing status. 

2020 Long-Term Capital Gains Tax Rates

Tax Rate

0%15%20%

Filing StatusTaxable Income

SingleUp to $40,000$40,001 to $441,450Over $441,450

Head of householdUp to $53,600$53,601 to $469,050Over $469,050

Married filing jointlyUp to $80,000$80,000 to $496,600Over $496,600

Married filing separatelyUp to $40,000$40,001 to $248,301Over $248,301

[Teresa0]

Okay, maybe I am confused. We did not gain anything on the previous sale . So why can we not use it this time? We did not take an exclusion the first time because there was no profit.

From IRS website

Eligibility Step 4—Look-Back

Determine whether you meet the look-back require- ment. If you didn't sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn't take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year pe- riod.

[DawnC · Accepted solution]

You can take the exclusion if you meet the requirements.   When you enter the sale, you will be asked if the exclusions apply.   You will also be asked if you excluded any of the gain on the previous sale which you can answer NO to.   If you did not meet the requirement of living in the home for 2 years, see the possible exclusion reasons below.   You will be asked about these also.  If you qualify, mark the appropriate box and the gain will be excluded.     TurboTax will walk you through all of this when you enter the sale.   

To qualify for a full exclusion, you generally must own your home for at least two years during the five-year period prior to the date of sale. There are a few exceptions, however.

1. If you had postponed gain on the home you sold under the old "rollover" rules, enter here the purchase date of the earlier home which you "rolled into" this home. If you had rolled over more than one, enter the date of the earliest purchase in the series. Once you have a date more than two years prior to your current sale, though, there will be no tax consequence of entering an earlier date.

2. If your spouse died and had owned the property longer than you, enter here the date your spouse purchased the property if your spouse also lived in it as his or her main home during that period.

3. If your spouse transferred the property to you (or if your former spouse transferred the property to you incident to divorce), enter the date your spouse (or former spouse) purchased the property.

4. If a prior home was destroyed or condemned and the basis of the home you sold depended on the basis of that prior home, enter the date you purchased the prior home.

5. You sold the home due to unforeseen circumstances. These can apply to you, your spouse, or anyone else living in the home. Unforeseen circumstances include:

 - Change of health
 - Death, divorce, or legal separation
 - Multiple births (twins, triplets, etc.)
 - Change in place (more than 50 miles) of employment
 - Receiving unemployment benefits
 - Change in employment leaving you unable to pay mortgage or basic living expenses
 - Military or foreign service
 - Natural or man-made disaster
 - Act of war or terrorism
 - Condemnation, seizure, or other involuntary conversion
 - Other unforeseen circumstances

Active-duty military and foreign service members may be able to look back over a period of time greater than five years.