Audubon, NJ asked in Tax Law for New Jersey

Q: I have owned my home for 2 Years, 5 months. The first year we owned it, it underwent massive renovations

and we couldn't live in it, so we temporarily rented nearby. We have only physically lived in the home for 16 months. Are we subject to capital gains if we sell now?

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1 Lawyer Answer
Marc A. Lewin
Marc A. Lewin
  • Tax Law Lawyer
  • Providence, RI

A: There's no clear answer provided in the tax laws that would establish your right to the income exclusion for the sale of a principle residence under IRC section 121. The regulations provide that 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. In establishing whether a taxpayer has satisfied the 2-year use requirement, occupancy of the residence is required. However, short temporary absences, such as for vacation or other seasonal absence (although accompanied with rental of the residence), are counted as periods of use.

It seems that your situation is somewhere between the following two examples provided by the regulations.

Taxpayer D, a college professor, purchases and moves into a house on May 1, 1997. He uses the house as his principal residence continuously until September 1, 1998, when he goes abroad for a 1-year sabbatical leave. On October 1, 1999, 1 month after returning from the leave, D sells the house. Because his leave is not considered to be a short temporary absence under paragraph (c)(2) of this section, the period of the sabbatical leave may not be included in determining whether D used the house for periods aggregating 2 years during the 5-year period ending on the date of the sale. Consequently, D is not entitled to exclude gain under section 121 because he did not use the residence for the requisite period.

Taxpayer E purchases a house on February 1, 1998, that he uses as his principal residence. During 1998 and 1999, E leaves his residence for a 2-month summer vacation. E sells the house on March 1, 2000. Although, in the 5-year period preceding the date of sale, the total time E used his residence is less than 2 years (21 months), the section 121 exclusion will apply to gain from the sale of the residence because, under paragraph (c)(2) of this section, the 2-month vacations are short temporary absences and are counted as periods of use in determining whether E used the residence for the requisite period.

A tax lawyer or your tax return preparer could help you develop facts and circumstances that might assist you with claiming the gain exclusion.

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