We live full time in RV with an Oregon address. We owned an RV lot in AZ where we spent the winters. We sold the lot in AZ. We considered it our permanent residence. Do we pay taxes on profit?

[NateTheGrEAt]

Hi @steelhead4me - thanks for chatting with us and asking such an interesting question. 

Here is a link to IRS regulations on the Section 121 exclusion (the official name for the home sale exclusion): 26 CFR § 1.121-1 - Exclusion of gain from sale or exchange of a principal residence. | Electronic Co...

Basically, I think you have two major hurdles to consider the sale of this lot as qualifying for the Section 121 exclusion.

First - you indicated that you only stayed there in the winters and used an Oregon address. Part of the regulation states:

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.

Based on this, and the fact that you were only there in the winter, I think there is a true factual question of whether the Arizona location qualifies as your principal residence. 

Additionally, even if you established that Arizona meets the definition of principal residence, I think it is a stretch to argue that the lot by itself qualifies for the Section 121 exclusion.

The relevant section of this regulation related to the sale of vacant land states the following: 

(3) Vacant land -

(i) In general. The sale or exchange of vacant land is not a sale or exchange of the taxpayer's principal residence unless -

(A) The vacant land is adjacent to land containing the dwelling unit of the taxpayer's principal residence;

(B) The taxpayer owned and used the vacant land as part of the taxpayer's principal residence;

(C) The taxpayer sells or exchanges the dwelling unit in a sale or exchange that meets the requirements of section 121 within 2 years before or 2 years after the date of the sale or exchange of the vacant land; and

(D) The requirements of section 121 have otherwise been met with respect to the vacant land.

Keep in mind that the lot itself is not your principal residence. The RV is. (A principal residence means a "dwelling unit"). In particular look at (C) - you did not sell or exchange the dwelling unit. (I am assuming you still own the RV since you didn't mention selling it?) If you sold the RV within 2 years after selling the land I think you have a much better argument. 

This is my opinion as one tax practitioner, but it is backed by IRS regulations and I hope you found it helpful.