All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

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Pioneer
Posts: 2
Registered: ‎05-02-2018

Determining Principal Residence for Capital Gains Tax Exclusion

I’m going to be moving from Seattle to Pittsburgh and I currently own a home in Seattle (for the last 10 yrs.). I’m looking at either renting or selling my Seattle residence, as well as buying a home in Pittsburgh. If and when I do sell the Seattle home, I don’t want to pay capital gains on the profit. I understand that the tax exclusion states:

$250k of profit ($500k if married) can be tax free if selling your principal residence. Principal Residence is living in the home for at least 2 of the 5 years before the sale.

I would prefer to hold on to my Seattle home for 1-2 years and rent it during that time, and then sell it with no capital gains tax. Since I will have a Pittsburgh house that I will be living in, when I sell the Seattle house could it still be claimed as my principal residence since I did live there for at least 2 out of the last 5 years?

Council Member
Posts: 548
Registered: ‎04-06-2016

Re: Determining Principal Residence for Capital Gains Tax Exclusion

You should refer to Pub 523: https://www.irs.gov/pub/irs-pdf/p523.pdf for a complete answer because there are other tests to determine whether or not you're eligible to claim the exclusion as well as the one you mention (info starting on pg 2).

 

To answer your specific question, "I would prefer to hold on to my Seattle home for 1-2 years and rent it during that time, and then sell it with no capital gains tax. Since I will have a Pittsburgh house that I will be living in, when I sell the Seattle house could it still be claimed as my principal residence since I did live there for at least 2 out of the last 5 years?"  It can be considered your principal residence for the years that it was your principal residence (for 2016 and 17 for example). It doesn't matter if you had a new principal residence since the Seattle one. As long as you can get 2 years that the Seattle home served as your principal residence during the 5 year period prior to the day you sell it, you'll satisfy that test.


One thing to be aware of, if you rent it, you'll need to adjust your cost basis by the rental depreciation regardless of whether or not you claim the depreciation on your return. (There are likely other rental considerations as well, but I'm not familiar enough with rental property to offer thorough advice on this.  Make sure you do some research on the tax ramifications, and cost basis adjustment for rental property.)

 

Karen

Pioneer
Posts: 2
Registered: ‎05-02-2018

Re: Determining Principal Residence for Capital Gains Tax Exclusion

Thank you for your time, Karen! I have indeed read pub 523 but it seems vague at times and I wanted to make sure I wasn't missing something. It just seems weird that I can claim a residence as "principal" even though I would have another residence that I actually live at. I should meet the rest of the exemption criteria as far as I can tell.

I've also read pub 527 on rental property and it immediately became clear to me that if I do rent, I'd get a CPA immediately to help me out. Smiley Happy

Highlighted
Council Member
Posts: 548
Registered: ‎04-06-2016

Re: Determining Principal Residence for Capital Gains Tax Exclusion

[ Edited ]
I've commented in blue text below.

Karen 


@partison wrote:

Thank you for your time, Karen! I have indeed read pub 523 but it seems vague at times and I wanted to make sure I wasn't missing something. It just seems weird that I can claim a residence as "principal" even though I would have another residence that I actually live at. I should meet the rest of the exemption criteria as far as I can tell. Yes, it is a bit confusing.  You have to think of it as whether the residence was your principal residence during the "at least 2 yrs" of the last 5 yrs that you're claiming as satisfying the requirement.  So, since it was/is your principal residence until you move, you can count the time you lived there toward the requirement.  

 

I've also read pub 527 on rental property and it immediately became clear to me that if I do rent, I'd get a CPA immediately to help me out. Smiley Happy

 

One other thing to consider... You can only take the exclusion once every two years. From pub 523, p. 3, "You may take the exclusion only once during a 2-year period."  So if you rent your Seattle house for 2 years and sell it in 2020, you'd have to wait until at least 2 years later (2022 anniversary of Seattle sale date) to sell your Pittsburgh house if you want to claim the exclusion for that house as well. Not sure if you're planning to be in Pittsburgh for a while, but something to be aware of.