Interesting question.

[JG EA]

Here's an interesting question I was asked. TP owns home, files in that home state because of previous IRS determination for his particular company. But he is only in his home less than 1/2 of the year. The rest of the time he is on company property in another area. He rents out his home (so vacation rental rules each year) for the majority of each year. Is there any issue for principal residence if he should sell? Aside from depreciation, that is.

If your answer is no, would your answer be any different if he rented somewhere else for 8 months of every year?

[Bees Knees]

Principal Residence

You said for more than 1/2 the year, the taxpayer is on company property in another area. I assume you mean he is actually living there on company property, otherwise he would not be renting out the home he owns.

Ownership is not a requirement for determining which is your principal place of residence. Your residences can also include property you rent as a tenant. But it can also include property you live in for the convenience of your employer, such as a resident caretaker for an apartment building. Many caretakers live in an employer owned apartment for free as a fringe benefit of their job. The same would be true for military people living in military housing. The benefit of living on the employer’s premises is excluded from income under section 119. But the section 119 exclusion does not disqualify the residence as a taxpayer’s primary residence.

What I am getting at is Regulation Section 1.121-1(b)(2) which defines the principal place of residence for purposes of excluding gain on the sale when there is more than one residence. It says: “In the case of a taxpayer using more than one property as a residence, whether property is used by the taxpayer as the taxpayer's principal residence depends upon all the facts and circumstances. If a taxpayer alternates between 2 properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer's principal residence.”

Note that this regulation does not require you to own the residence for it to be considered your principal residence. Obviously you have to own the residence for purposes of excluding gain under section 121, but not for purposes of deciding which residence is your principal residence to qualify for the exclusion.

So in the case of a taxpayer who does not use the property he owns as a principal residence, then obviously no exclusion would be allowed on its sale. In your case, the taxpayer is using an employer provided residence as the principal residence, and the property he owns as a secondary residence. No section 121 exclusion allowed when it is sold.

That gives you the opportunity to provide tax planning for your client. Inform him in writing that if and when he wants to sell his property, he should make sure he lives there more than 6 months in each of the last 2 years so that he could convert it to his principal residence and exclude the gain.

[jainen]

income property

You might find help in the state guidelines about residence and domicile, such as where client does his banking and shopping and goes to church. Also consider the nature of the job assignments, whether they are temporary with specific end dates. If the facts are not strongly in his favor for two years I don't think he can get the exclusion. Right now it looks like income property. The best way to claim it is his home is to treat it as his home.

[Gene V]

Use test

You might find help in the state guidelines about residence and domicile, such as where client does his banking and shopping and goes to church.

If JG client consider where he own his home as his resident and follow the guidelines like jainen pointed out and he qualifies under the example showed in Pub. 17 Period of Ownership and Use The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous.

You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days during the 5-year period ending on the date of sale.

So, if JG client live in his home for 5 month each year, (5 month x 5 years = 25 month)
Would he not qualify for the Sec. 121 Exclusion. Since he meets the 24 full months during the 5-year period.

[B C]

interesting question

Gene, Did you mean to say he would qualify for the 121 exclusion based on the 24 full months in 5 years based on your example?

[Gene V]

Bill

Bill, The way I read the information in Pub. 17 and 523, he would qualify base on the 24 months within the last 5-years. He could have live in the house the first two years and rented it out the last 3 years and still qualify for the exclusion. We’ll have to see what Bees Knees says about this.

[Bees Knees]

Maybe, maybe not...

You are referring to Regulation Section 1.121-1(c) which deals with the ownership and use requirements. A residence must be both owned and used as a principal residence in 2 out of 5 years. However, those 2 out of 5 years, do not have to be the last two years, nor do they have to be concurrent (meaning both owned and used at the same time). It also implies that those 2 years can be broken up into 24 full months or 730 days. But the regulation is silent on the consecutive use idea. It is implied, and I know early interpretations of this implied non consecutive use would qualify, but it is not included in the final regulations that you can break up the 2 years in hit and miss fashion to come up with 24 full months.

The definition of a principal residence, however, is included in sub section (b) instead of (c). Sub section (b) is where it says if you have two residences, then the one used more than half the year is the principal residence. It even gives the example where you use one for 5 months out of each year and another 7 months out of each year. When sold, only the 7 months out of each year residence qualified, even though the one used 5 months out of each year adds up to 25 months in a 5 year period (greater than 2 years).

So I don’t believe you can take non consecutive months out of context and say you have 24 months out of 5 years if it could be proven another residence added up to even more total months in a 5 year period.

I think you might have a case if the taxpayer while living on the employer’s property moved around all the time to various locations, so that he never lived in one location any longer than the property he owned during the year. Then it would appear you can take total months occupied during a 5 year period, and if they add up to 24, you can exclude the gain.

[JG EA]

Thanks to all.

Thank you. I'll do some more reading on this, but I'll take your advice and advise the client if selling is in his immediate future.