Sale of Personal Residence

[TAXNJ]

SCENARIO
House #1 - On 12-19-2019, Client sold a home owned client bought 1-15-91, but had a loss due to the basis was much higher than the client sold it.(actually a $155,800 loss) and not able to take advantage of the capital gain exclusion.

House #2 - On 11-20-22, Client sold a home owned client bought 1-17-20.Since the client did not meet the meet the eligibility test of “owning the home and used it as your main home during at least 2 of the last 5 years before the date of sale.” The client did live in it and owned the home for the two years.
But does the 5-year rule play apart where the client cannot take advantage the exclusion?
Client will not able to take advantage of the capital gain exclusion.
Question: since client was not able to take advantage of the capital gain exclusion house #1 – will the client be able to take advantage of the exclusion on house #2 or not due to the 5 year rule?

[BOB W]

It's any 2 years out of the last five. As soon as he has 2Years, he qualifies. A person can use the exemption every 2 years if qualified.

[TaxGuyBill]

On 11-20-22, Client sold a home owned client bought 1-17-20

It isn't a five year rule, it is a 2-out-of-5 year rule.

So from 11/20/17 (five years before the sale) to 11/20/22 (sale date), did the client own and use the home as their Principal Residence for at least 2 years? If so, it qualifies for an exclusion.

[TAXNJ]

It's any 2 years out of the last five. As soon as he has 2Years, he qualifies. A person can use the exemption every 2 years if qualified.

The issue is what does the 5 years play in the rule? The client does not need to own it for 5 years to meet the ownership test?

thanks

[New York Enrolled Agent]

The issue is what does the 5 years play in the rule? The client does not need to own it for 5 years to meet the ownership test?

thanks

I.R.C. section 121(a)
Exclusion —
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more.

[TAXNJ]

It isn't a five year rule, it is a 2-out-of-5 year rule.

So from 11/20/17 (five years before the sale) to 11/20/22 (sale date), did the client own and use the home as their Principal Residence for at least 2 years? If so, it qualifies for an exclusion.

Talking about the 5 year rule (the dates) and how it applies to house#2? The main question is does the client need to own the house 5 years. Need further clarification how the 5 plays in the 2 out of 5 year rule.

Yes, the client did live in the house but re-looking at the timeframe 11/20/17 to 11/20/22 is not two years.

from Original Post
House #2 - On 11-20-22, Client sold a home owned client bought 1-17-20.Since the client did not meet the meet the eligibility test of “owning the home and used it as your main home during at least 2 of the last 5 years before the date of sale.” The client did live in it and owned the home for the two years.
But does the 5-year rule play apart where the client cannot take advantage the exclusion?
Client will not able to take advantage of the capital gain exclusion.
Question: since client was not able to take advantage of the capital gain exclusion house #1 – will the client be able to take advantage of the exclusion on house #2 or not due to the 5 year rule?

thanks

[TaxGuyBill]

The main question is does the client need to own the house 5 years. Need further clarification how the 5 plays in the 2 out of 5 year rule.

No, the person does not need to own the house for 5 years. It is basically a TWO year rule, but the two years can happen anytime in the last five years.

[terryats]

As Bill told you, as long as your client lived, and owned home for any two years in the last 5 years he is qualified for a sec 121 exclusion. You said your client bought home 1/17/2020, and sold it 11/20/2022 that is over two years, so YES your client qualifies for the exclusion

[TAXNJ]

No, the person does not need to own the house for 5 years. It is basically a TWO year rule, but the two years can happen anytime in the last five years.

Thank you all for the replies.
The client had lost out for the C/G exclusion in 12/19/19 due to having a loss when she sold her first home in 12/19/19.
On this second home sold 11/18/2022 and bought 1/17/2020 (owned about 33 to 34 months). Yes, that covers the 2 year rule. Information originally given by the client had us looking at “the Look-Back” requirement, etc.
In addition, the client and her neighbors are being sued (lien) for a “Recapture Fee” and now $30k of the sale price proceeds is being held in escrow until a court decision (but will not have an impact on the tax return). That court decision could take years.

[Lion]

The "Look-Back" requirement is that you cannot have sold another home in the last two years. In other words, you can use the Sec 121 exclusion only once every two years if you meet all the other requirements. (You can amend the return of the prior year sale, if it prevents the new sale with a larger gain from being excluded.)

By the way, your client did NOT lose out for the C/G exclusion in 2019, because she had a loss. She didn't have any capital gain to exclude!