Ownership and Use Tests

[KBTS]

Client called this morning with questions about selling their home. They bought the land and started building in April of 2004. While the house was under construction that summer and fall, the client stayed in the home several nights a week. House was finally completed and they started living there full time in November of 2004.

If they sell after November, they clearly meet the ownership and use tests to exclude any gain on the sale. But if they sell before November, do they meet the ownership and use tests? I think they meet the ownership test since the house was started in April. My first reaction is that they do not meet use test since it would not have been considered their main home until they moved there permanently in November of 2004, but I cannot find a definite answer for this particular situation. Any thoughts on this?

Thanks

[Armando Beaujolais]

Client called this morning with questions about selling their home. They bought the land and started building in April of 2004. While the house was under construction that summer and fall, the client stayed in the home several nights a week. House was finally completed and they started living there full time in November of 2004.

If they sell after November, they clearly meet the ownership and use tests to exclude any gain on the sale. But if they sell before November, do they meet the ownership and use tests? I think they meet the ownership test since the house was started in April. My first reaction is that they do not meet use test since it would not have been considered their main home until they moved there permanently in November of 2004, but I cannot find a definite answer for this particular situation. Any thoughts on this?

Thanks

It's a facts and circumstances deal, but from what you wrote, I don't think the new home would qualify until November. You stated he "stayed there" beginning in April, but "started living there full time" in November. Staying there doesn't make a home the principle residence. Living there full time does.

There's info about criteria to determine a principal residence in Reg. 1.121-1(b). It states "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."

Other factors shown are address of the taxpayer's family, address listed on the drivers license and mailing address.

Add in that the house wasn't completed and ready to be lived in until November, I don't see many facts in favor of calling it a principal residence in April.

[Bird Legs]

However, if

the house became the permanent residence in November, 2004 and remained the permanent residence until sold after November 2006, then it would meet the criteria.

[jainen]

winter storms

Section 121 applies to principal residence, which is the home they spent the most time in. One thing to watch out for is whether they already used the exclusion on their previous principal residence within two years.

Another thing to look at is the amount of taxable gain. Property values haven't risen so fast in the last two years, and may even be dropping in some areas, especially as we get past the main summer sales time. They might do better by accepting a good offer now and paying the tax, than taking a chance on the winter storms.

[jainen]

For example

For example, suppose their land was 100K and construction was 200K, and they can sell this summer for $500,000. Gain is 200K so 15% tax would be $30,000. If they wait and interest rates get another bump, the market settles or the property doesn't look so good in the rain, a 10% drop in value would cost $50,000.