Selling primary residence that was initially a vacation home

[bb271]

Hi,

We had a vacation home from 1996 thru 2016.  At the beginning of 2017, we made it our primary residence, living there full time til we sold it late in 2020.  I thought that since we lived in the home over 2 years of the last 5 years, that our gain (gain is less than $500k) wouldn't be taxable but turbo tax is saying a portion IS taxable.  It asked us how many days the home was used for a "non qualified purpose" since 2008.  So its basically saying that a portion of the gain relates to 2009 - 2016 which would make that portion taxable.

I thought since we lived in the home well over 2 years of the last 5, our gain wouldn't be taxable.  Am I entering something incorrectly into turbo tax or is turbo tax set up incorrectly for 2020?

Thanks.

[bb271]

We had a vacation home from 1996 thru 2016.  At the beginning of 2017, we made it our primary residence, living there full time til we sold it late in 2020.  I thought that since we lived in the home over 2 years of the last 5 years, that our gain (gain is less than $500k) wouldn't be taxable but turbo tax is saying a portion IS taxable.  It asked us how many days the home was used for a "non qualified purpose" since 2008.  So its basically saying that a portion of the gain relates to 2009 - 2016 which would make that portion taxable.

I thought since we lived in the home well over 2 years of the last 5, our gain wouldn't be taxable.  Am I entering something incorrectly into turbo tax or is turbo tax set up incorrectly for 2020?

Thanks.

[ColeenD3]

Depreciation on a rental property has to be recaptured. That is the amount that is not excluded.

[bb271]

Hi Coleen, the property was not used as a rental.  It was also never depreciated.  It was only used by the owners as a vacation home for personal use.   In that scenario, would a taxable capital gain be required?

[DawnC]

You should be entering in the Sale of Your Main Home section since it was your main home when you sold it.    Since you never rented out the property, the depreciation recapture does not apply.   Make sure that you answer NO to the Did you take a home office deduction or rent out all or part of the home? question.  

You may need to delete the sale and re-enter it if you have made changes.   You can look on the Home Sale worksheet in Forms mode to see the calculation.   There is a limitation based on non-qualified use of the property, but only applies to the 5 year period before the sale of the home.   See the excerpt below from Publication 523 (page 15).    

Determine your non-qualified use gain. Complete this section only if there is a period, after the year 2008, when neither you nor your spouse (or your former spouse) used the property as a main home, and that period of non-use occurred during the 5-year period prior to the date of sale and before the time when you or your spouse (or your former spouse) used the property as a main home.*   The question regarding home many days of non-qualified use determines the limitation on the excludable gain.   You only need to include the days when the house was not the primary residence during the 5 years prior to the sale.   If it was sold in 2020, the 5 year-period started in 2015.  So only enter the days between that date in 2015 and the day in 2017 when the property became the main home.  The limitation percentage (non-qualified use/total days owned) should be very low in your case.   

[bb271]

Thank you so much.   This helps clarify the process quite a bit..

[bb271]

Hi Dawn,

I looked at the forms in turbo tax.  The one thing it doesn't seem to say is that I should only include the unqualified days from the last 5 years prior to date of sale.  The forms and the turbo tax guidance on the form make it sound like I need to include all non qualified use days from 1/1/2009 thru the time we moved in full time.  Is there any other source I can look that will be more specific?   Thanks so much for your help.

[DawnC]

The link I posted above - page 15 is from the IRS instructions for completing the worksheet I referenced in TurboTax.    See worksheet #3 which is used to determine the limitation on the gain exclusion.   

[bb271]

Hi Dawn,

I'm sorry to keep harping on this issue but it makes a huge difference in our tax bill.  I understand your response completely and it would result in a very small tax bill.  

Please see the attached article.  It doesn't say anything about limiting the non qualified use percentage calculation to only the 5 years prior to date of sale.  It actually includes an example of someone using a place for 8 years.  First 5 were for business and last 3 it was used for personal residence.  The author states that 5/8's of the gain is considered non qualified for the capital gain exclusion.

Please take a look at this article and let me know what you think.  Thanks so much.

Intuit wont let me paste the link to the article but it is entitled

How the Loophole in IRC Section 121 Can Benefit Homeowners

and is on the cpajournal.com website. 

Thanks.