Primary Residence Tax Exclusion Question

[kestaxman]

Client has lived at location for the last 6 years ending Dec 31st 2018. Starting in 2019 he purchased a new primary residence and turned this old primary residence into a rental starting Jan 14 2019. If he sells the old primary residence (that is a now a rental) before the end of 2021 would he be able to get the $250,000 home tax exclusion?

[TAXNJ]

See The TaxBook starting at 6-20 (also do a “search” for this topic on this website)

“Exclusion of Gain

Principal residence defined. A principal residence is the taxpayer’s main home, which is the home where he or she ordinarily lives most of the time. A taxpayer can only have one main home at any one time.

Did You Know? A taxpayer’s principal residence may be in a different location from his or her tax home. See Travel and Lodging,page 8-9, for information on tax home.

Individual homeowners. Individuals can exclude up to $250,000 of gain on the sale of a home if three provisions are satisfied.

1) Ownership. The individual owned the home for at least two years during the 5-year period ending on the date of sale,

2) Use. The individual used the home as a principal residence for at least two years during the 5-year period ending on the date of sale, and

3) Previous gain exclusion. The individual did not exclude gain from the sale of another home during the 2-year period ending on the date of sale.

A taxpayer who owns a home jointly with another individual can exclude gain from the sale of an interest in the home if the individual meets all three conditions. Co-owners must figure gain or loss according to his or her ownership interest in the home and then apply the exclusion rules on an individual basis.” ......

[AZUKHiker]

Provided they satisfy all the rules listed by TAXNJ you are correct that they have three years from Dec 31st 2018 to sell the property and benefit from the $250,000 exclusion. Just remember to remind them each year that the deadline is running down if they are not intending this to be a long term rental.

[TaxGuyBill]

As the others said, yes. But a couple of other things to remember: (1) If the first home was not always their Principal Residence (such as it used to be a rental), the you would have "Nonqualified Use" and only part of the gain can be excluded. (2) the depreciation on the home can not be excluded, so that will be taxable when it is sold.