We own a home with mort. that we spend weekends and vacations at. We rent an apartment for weekdays. What kind of property is our home? Primary Home? Second Home?

[Mike9241]

this is from the IRS regulations 1.121-1(b)

(2) Principal residence. In the case of a taxpayer using more than one property as a residence, whether property is used by the taxpayer as the taxpayer's principal residence depends upon all the facts and circumstances. If a taxpayer alternates between 2 properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer's principal residence. In addition to the taxpayer's use of the property, relevant factors in determining a taxpayer's principal residence, include, but are not limited to -

(i) The taxpayer's place of employment;

(ii) The principal place of abode of the taxpayer's family members;

(iii) The address listed on the taxpayer's federal and state tax returns, driver's license, automobile registration, and voter registration card;

(iv) The taxpayer's mailing address for bills and correspondence;

(v) The location of the taxpayer's banks; and

(vi) The location of religious organizations and recreational clubs with which the taxpayer is affiliated.

so based on the info you provided the rental would be your principal residence.  the one you own would be a second home. 

and thus the home you own would not qualify for the home sale exclusion.  

[mkhallock]

When my husband retires in a few years, how long would we have to live in it to be able to receive the home sale exclusion?

[mkhallock]

Thank you for the quick and informative reply! 

[Mike9241]

based on current tax law

it would have to be your principal residence for at least 2 years (the years do not have to be consecutive) out of 5 years prior to the sale. put another way 730 days during the years it is your principal residence in up to the 5 years before the sale. your home must be the principal residence for the year for the days in the year you lived there to count.  

[AmeliesUncle]

As Mike said, two years.

However, because the home was not always your Principal Residence, the exclusion will be prorated based on the amount of time it was your Principal Residence compared to the total time of ownership.

[Mike9241]

because the home you owned was really a vacation home before it will become your principal residence the exclusion is figured as follows:

1) period not a principal residence during term of ownership

2) total ownership period 

3) gain

4) non-excludable gain  3) times 1)  divided by 2)

5) excludable gain 3) minus 4)

example 

1) 13 years

2) 15 years

3) $750,000

4) $650,000

5) excludable gain only $100,000 

now if it was your principal residence for 25 years

the non-excludable gain would be $750000 times 13 divided by 25 0r $390,000

leaving an excludable gain of $360,000

what this shows is the longer you live in it as your principal residence the larger the excludable portion up to a current maximum of $500,000

[Opus 17]

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@AmeliesUncle wrote:

As Mike said, two years.

However, because the home was not always your Principal Residence, the exclusion will be prorated based on the amount of time it was your Principal Residence compared to the total time of ownership.

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This is a complicated issue called "non-qualified" periods of ownership.  The idea is that you aren't allowed to convert a taxable vacation home into an excludable main home just by moving into it for the last two years.

Take the simple case where you bought the vacation home in 2010, make it your main home in 2023, and sell it in 2025.  You owned the home for 15 years but only 2 years were qualified.  That means you pay capital gains tax on 13/15ths of the gain, and 2/15ths of the gain (13%) is eligible for the exclusion.  If you sell the home in 2030, then 7/20ths (35%) are eligible for the exclusion.  The longer you live there as your main home, your excludable percentage keeps creeping up but never gets to 100%. 

Now, due to a change in the law, periods of ownership before 2009 are "qualified" even if you did not live there.  So if you bought the vacation home in 2000, make it your main home in 2023 and sell it in 2025, then:

2000-2008 is qualified

2009-2022 is non-qualified

2023-2025 is qualified.  

So out of 25 years, 10 years is qualified and you can exclude 40% of the gain.  The other 60% of the gain is taxable as a long term capital gain, and if the 40% of the gain is more than $500,000, that will also be taxable, of course. (You should be so fortunate as to have a $1.5million gain.)

[mkhallock]

Thank you!