Sale of 2nd Home

[TreyLagger]

I'm trying to determine if we qualify for excluding the gain from the sale of our "winter" home. We have lived in it 6 months per year each of the last 5 years. The IRS provides the following guidance:

"In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale."

Our "summer" home is where we pay state taxes and hold drivers licenses. I think we qualify for the exclusion and am hoping someone here might have experience with this process.

Thanks!

 

[Philliefan33]

I don’t think you can simultaneously have two main homes.

Which address do you use to file your Federal (and state, if applicable) income tax return. Where are you registered to vote?

 

[statsman]

I don’t think you can simultaneously have two main homes.

Which address do you use to file your Federal (and state, if applicable) income tax return. Where are you registered to vote?

I agree. I think the IRS is going to make you choose which home was the "main home".

I would also agree about where you are employed and what address is on your tax records as being the primary determination for "main" home. Other criteria includes automobile and driver's license registrations and where you voted.

 

[38Chevy454]

Have you rented the winter home out during the period when you were not there? Taken depreciation or anything against taxes as a Sch E type income? Even if Sch E income, you meet for greater than 2 out of 5 years (5 x 0.5 years = 2.5 years total). Just makes it a bit more complicated. I think you can take the exemption as the rule doesn't say it has to be occupied by you as full time continuous. You meet the 2 out of 5 rule, although if you have not rented it, you technically lived for 5 out of 5. Even though you did not live there, it was your house. Along with your second summer house. It is easier to prove the summer house as that is also where you consider permanent with driver's licenses and taxes. But that doesn't disqualify from the second home the way I interpret the rule. There are better tax people than me though that can either confirm or say why I might be incorrect. The sticking point is the "main home" term. The winter home was your main home when you were there for 6 months.

I had kind of related issue. Moved for offsite assignment for work, bought new home in offsite location approx 1000 miles away. I kept my old home and rented out for 3 years. Sold it then at 3 year mark, so I met the 2 years out of 5 rule. Even though by then I had my permanent residence as the offsite location for driver's license, taxes and more. My case is different from yours in that I did use old house as my residence for 2 years continuous with the driver's licenses, taxes and more. But it was sold as a second home and that is similar to your case. I used the exemption to avoid some taxes.

 

[cathy63]

Pub 523 is the place to look for the most detailed info. https://www.irs.gov/pub/irs-pdf/p523.pdf

Sale of your main home. You may take the exclusion, whether maximum or partial, only on the sale of a home that is your principal residence, meaning your main home. An individual has only one main home at a time. If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a "facts and circumstances" test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well. They are listed below. The more of these factors that are true of a home, the more likely that it is your main home.
• The address listed on your:
1. U.S. Postal Service address,
2. Voter Registration Card,
3. Federal and state tax returns, and
4. Driver's license or car registration.
• The home is near:
1. Where you work,
2. Where you bank,
3. The residence of one or more family members, and
4. Recreational clubs or religious organizations of which you are a member.

The IRS does not care whether you live in your "main home" during the summer and go to your alternate home during the winter or vice versa.

From your description, it sounds like you do meet the ownership and residence tests, and presumably you meet the look-back test as well. The question really boils down to the items listed above. If your summer home is where you receive your main mail, where you vote and pay taxes and have your bank accounts, and where your cars are registered, then that is your main home and you can't legally exclude the gain on the winter home.

 

[TreyLagger]

Thanks everyone for the replies. It sounds like we may not qualify for the exemption. We do tend to spend a little more time at our winter home than our summer home, but the summer home is where we vote, the address for our taxes and where our drivers licenses are from.

 

[GreenEggs]

It's not like you're selling both of them at the same time & trying to claim each of them as your primary residence.

I'd ask your CPA.

 

[OldShooter]

I would create a file supporting your decision to treat the sale as sale of a main home. Include clips like the one in your OP plus your occupancy history records, Then file that way with your favorite tax program, not with a paid preparer who has to sign the return.

Given the low rate of audits, you will almost certainly never hear from the IRS. If you do, simply state your rationale and offer to pay back taxes and interest if the IRS determines that they are due. My guess, IANACPA, is they will not assess penalties as long as they perceive that you acted reasonably in good faith.

I used to have a CPA who said "If you don't get audited once in a while, you're not trying hard enough." Oddly, we have never been audited.

Now here come the people who will object to this advice.

 

[pb4uski]

Do you claim a homestead exemption on either home? If so, which one?

While I agree with OldShooter that the risk of getting caught is low, if you do get caught the greater risk is that they decide to make an example of you because you really didn't have any reasonable basis for claiming it as your main home.

In other words, I think it's going to be really difficult to prove that you acted in good faith.

 

[Ready]

If you truly live in each home for exactly half the year you have a good argument to make that you can define either one of them as your “main” home. However, if you take the deduction on your winter home, you may be prevented from taking the gain on the summer home down the road. I would talk to a CPA about this. I’m not sure if living exclusively in the summer home for at least the next two years would allow you to also take the exclusion down the road or not.

 

[donheff]

I'm curious about the implications for the state where the winter home is located. If you have been filing taxes in your summer state but then claim your main residence as being in winter state, doesn't winter state have a claim on state taxes for the period you were supposedly using it as your main residence?

 

[Bamaman]

I don’t think you can simultaneously have two main homes.

Which address do you use to file your Federal (and state, if applicable) income tax return. Where are you registered to vote?

I agree with that. No reason to throw up any flags.

But again, the amount of gain on the sale is to be considered too. I wouldn't want to use the exclusion if there's not a substantial gain and I might want to sell the other house in the near future.

 

[38Chevy454]

I'm curious about the implications for the state where the winter home is located. If you have been filing taxes in your summer state but then claim your main residence as being in winter state, doesn't winter state have a claim on state taxes for the period you were supposedly using it as your main residence?

If in OP's case the winter home is in FL or TX, no state taxes. If not FL or TX then you have a valid question.


As for the earlier question about taking he winter home exemption, and then not able to take on the summer home? That is incorrect, as long as there is sufficient time between the sales of each it would not be an issue. Sure if both sold in same year it is not accurate to have two main homes at same time as far as the sale timing. But wait a year or two and then it is a valid case to stack the exemption up to the limit for a couple ($500K) on personal residence. I think 2 years or longer would be safer than 1 year.

 

[cathy63]

...As for the earlier question about taking he winter home exemption, and then not able to take on the summer home? That is incorrect, as long as there is sufficient time between the sales of each it would not be an issue. Sure if both sold in same year it is not accurate to have two main homes at same time as far as the sale timing. But wait a year or two and then it is a valid case to stack the exemption up to the limit for a couple ($500K) on personal residence. I think 2 years or longer would be safer than 1 year.

It's not just a matter of being "safer" to wait 2 years, the tax code actually requires that. Once you've determined that the home is your "main home", then there are three parts to the Eligiblity Test for the exemption: Ownership, Residence, Look-Back. The two year rule is the Look-Back test. It's based on sale dates, not tax years, so if you sold a home in June 2019 and used the exemption, you can't use it on another home sale that occurred in April 2021, but you could use it if you sell in September 2021.