Question on 2 out of 5 year gain exclusion

[cc11jimmy]

Hello tax gurus, I have a few questions on how to apply publication 523, in order to benefit from the $250k/$500k exclusion. Can anyone help?

1. I want to nail down the exact date to meet the 2 out of 5 years rule. Is it by days or months? I had a primary property since 2013. I converted it to rental and rented it out on Nov 1, 2017. Say I moved out on Oct 20, 2017 into a new property I bought. If I sold the rental property on Oct 30, 2020, would I meet the 2 out of 5 year rule in order to take exclusion?

2. The exact move out date and move in date is a blur for me. Which date is the one I need to consider for the 2 out of 5 year rule? The move out date? The rental start date? The new property purchase date? The move in date to new property? How can I find that exact dates in prior year tax filings or turbo tax?

3. How can I report such sale in turbo tax exactly in order to reflect this was a primary converted to rental? Where can I indicate it is within 2 out of 5 years or turbo tax knows how to calculate automatically?

Thank you so much. 

@Carl @SusanY1 @Opus 17 @TaxGuyBill @DoninGA @BillM223 @VictoriaD75 

[Carl]

The look back starts from the closing date of the sale.

For conversion to rental:

If you moved out on or after the 16th of the month, that entire month counts as having lived in it as your primary residence.

For conversion to personal use:

If the last tenant moved out on the 16th or after, (or you converted the 16th or after) that entire month is *NOT* considered as the property having been your primary residence.

. If I sold the rental property on Oct 30, 2020, would I meet the 2 out of 5 year rule in order to take exclusion?

If you moved in on or before Nov 15th, 2018, and it remained your primary residence up to the closing date of the sale, it would qualify for the exclusion.

If you moved out on or after Oct 16, 2017 and it was your primary residence from "at least" Oct 15, 2015 or before, it would qualify for the exclusion.

Understand how the $5K exclusion works if you're filing joint. It's perfectly possible for you to qualify, but not your spouse (and vice versa). That's why the program will ask these questions for both tax filers if filing a joint return.

[cc11jimmy]

Thank you so much for the quick rely!

I owned from 2013. Positive I moved out after Oct 16, 2017 and before rental start on Nov 1, 2017. In that case, in order to qualify for the exclusion, do I have to close the sale of same property before Oct 31, 2020?

If it is sold on Nov 1, 2020, will I lose all the exclusion (all or nothing)? Reading something about safe harbor to achieve partial exclusion (unforeseen events etc.). Covid-19 is causing financial stress (furlough) and we want to sell to hold more cash. Would that allow me more time to sell?

To complicate the situation a bit more... we were doing MFS in prior years. Rental was under my spouse's filing. Next year we plan to do MFJ. Is that going to make reporting under Turbotax much harder, if not impossible?

Thank you again.

@Carl 

[Carl]

Generally, I myself do a day count. Five years back from the closing date of the sale will have "at least" one leap year in it. So that's 1826 days. (the closing date of the sale does not count as a day for anything.)

So if it was your primary residence for at least 731 days of the last 1826 days you owned it, there's no need to get picky about move in/out dates.

Bottom line is, when using TurboTax the program will "know" based on the dates you enter, if you qualify or not. Either you do, or you don't. Period.

[cc11jimmy]

Thank you very much. All make sense.

Trying to come up with the absolute latest closing date of upcoming sale in order to qualify for 2 out of 5 years, when file for 2020. I was hang up on what date is the last date to count as primary residence, thus bring in all the dates in questions. Sounds like it will either be the date I moved out or since I moved out after Oct 16, 2017, I have the freebie till October month end.

Do you happen to know anything about Safe Harbor that potentially can achieve partial exclusion? Want to see that can be the back up plan in case sale cant be closed in time. Any insight into the last MFS to MFJ question.

Apologize of being a newbie here and ask all the questions. Do I need to @ more people in order for people to see the questions?

Thanks again.

@Carl 

[Carl]

Do you happen to know anything about Safe Harbor that potentially can achieve partial exclusion?

If you were active duty military or a government employee "FORCED" to move because of PCS or relocation orders, then the 2 of last 5 rule can be extended to a maximum of "2 of last 10".  Can also get a partial exclusion under those circumstances if you were forced to move before you could complete the 2 years as your residence.  But that doesn't work if you were moved under orders in say, 2012, retired or left the military or government job in 2017 and did not move back into the house afterwards.

As an example, lets say you are military and have been for the last 10 years. In 2015 you were relocated by the military under PCS orders to Florida, where you purchased a house. Twenty months later the military issues you PCS orders to Japan for a four year tour.

After the Japan tour you retire/separate from the military and move to Texas. If you don't close on the sale within 1 year after your separation date, you flat out do not qualify for the exclusion. But lets say you do sell the property within one year after separating from the military, and you have a $200,000 gain.

For each month you lived in the house you get to exclude approximately 10.1% of your gain from taxes. Understand that's *NOT* a percentage of $250,000 you get to exclude. YOu can exclude about 10.1% of your Actual gain* from taxes for each month you lived in the house as your primary residence.

So having lived in the property 20 months of the last 6 years you owned it. (you left the military, so you only get to add one year past your separation date to the exclusion rule)

So if you sell the house for a $200,000 gain, you only get to exclude about 83% of that gain from taxation, or roughly $166,000. So you will pay taxes on $44,000 of that gain.