My clients bought their home in 1991. They lived in it until 1995 when, due to the wife’s health problems, they moved out and into the husband’s parents’ home. The husband is a long-haul trucker who is gone for weeks at a time. The wife, due to a car accident in 1995, suffered a head injury and requires 24 hour supervision. This is provided by her mother-in-law and is the reason they moved into her home. They also have a young son. The couple’s home was vacant for many years, except for their household belongs, which they stored there. In March of 2009, they moved their belongings out and rented it out for a non-consecutive period of 43 months. On May 31, 2013 they sold it. They did not live there for the 5 years prior to the sale of the property.

There is a gain of approximately $65,000 on the sale of the property. I know that the depreciation will have to be recaptured, but otherwise, is there any exception that might apply here to exclude the rest of the gain under the primary residence exclusion? I know this is probably a long shot! Thank you.

My clients bought their home in 1991. They lived in it until 1995 when, due to the wife’s health problems, they moved out and into the husband’s parents’ home. The husband is a long-haul trucker who is gone for weeks at a time. The wife, due to a car accident in 1995, suffered a head injury and requires 24 hour supervision. This is provided by her mother-in-law and is the reason they moved into her home. They also have a young son. The couple’s home was vacant for many years, except for their household belongs, which they stored there. In March of 2009, they moved their belongings out and rented it out for a non-consecutive period of 43 months. On May 31, 2013 they sold it. They did not live there for the 5 years prior to the sale of the property.========>>>>>>>>> If you used pre-1997 rules for residential sales, don't worry. That doesn't disqualify you from claiming the exclusion on any residential sales now. The law change applies to all sales since it took effect;they do not have to live there for 5years; In order to claim this exemption, you must have lived in the property as your primary residence for two out of the last five years.


There is a gain of approximately $65,000 on the sale of the property. I know that the depreciation will have to be recaptured,============>>>>>>>>>correct; they , as they have LTCG on the sale of the home(once used as rental home), must recapture sec 1250 depre on form 4797 as ordinary income taxed at 25% aslongas their marginal tax rate is 25% or higher.so the sec 1250 depre’d decrease the amount of nontaxable LTCG .
but otherwise, is there any exception that might apply here to exclude the rest of the gain under the primary residence exclusion?=======>>>>>>>>>> For the purpose of calculating capital gains, the period of non-qualifying use is any period of time the property is not being used as a main home that begins on or after Jan 1, 2009. Non-qualifying use prior to January 1, 2009, is disregarded for the purpose of determining the capital gain allocation. Temporary absences not exceeding a total of two years in aggregate will not jeopardize qualifying use. A property can maintain its status as a primary residence even if the homeowner is absence due to change in employment, health conditions, or other unforeseen circumstances. For example, assume A and B buy a condominium in 2009. They already own a house which they use as their primary residence. They let their daughter C live there for the first two years. A an dB move into the condo in 2011 and makes it their primary residence for three years. A and B sell the condo in 2014 after owning the property for five years. During the five years that A and B owned the condo, there were two years of non-qualifying use when the property was not A and B’s primary residence. There were three years of qualifying use when A and B lived there as their primary residence. The ratio of non-qualifying use is 2 / 5, or 40%. Forty percent of the gain will be taxable capital gains, and the remaining 60% can be excluded from capital gains, up to the exclusion limit of $500k for married couples filing a joint return.

Thank you so much for your reply. So, if I'm understanding this correctly, since the house was vacant for 17 months of the 60 months prior to selling it, that time period is considered qualified use? (Due to unforeseen circumstances exception). Therefore, 17/60 or 28% of the gain is excludable under the primary residence exclusion?

#1;No; qualified use means a home used as a primary residence for a TP. Noqualified use means a home used as a rental(investment) purposes rather than a personal use home as a primary home. For example, So, in general, the capital gain resulting from the sale of the property will be allocated between qualified and non-qualified use periods based upon the amount of time the property was held and used for qualified versus non-qualified use.For example let ‘s make it simple, assume that you buy your property on Jan. 1, 2009 for $400K and lease(rent) it out for two years. you claim $20K of depreciation deductions(sec 1250 recapture I mean) on the rental pty for those two years. On Jan. 1, 2011, you convert the property and begin to use the property as your primary residence. You move out of your property on January 1, 2013, and subsequently sell it for $700K on Jan. 1, 2014.The period from 2009 through 2010 is non-qualified use of the property because it was held as investment (rental) property as mentioned above. The year 2013, after you moved out, is treated as qualified use of the property as you used it as primary home for 2years;2011-2012.Out of the $300K; I mean $700K-$400K total long term capital gain, 40 percent or 2/5ths (two years(rented for 2 years;2009-2010) out of five years), or $120K , is not eligible for the tax free exclusion. The balance of the capital gain, or $180K, may be excluded tax free under Section 121. The $20K gain attributable to the depreciation deductions is recaptured taxed at 25%(if your tax rate is 25% or higher), as required under current law.So, to sum it up, if your tax rate is 25% then 15% of gain tax’d be applied to $120K while zero tax on $160K and 25% of tax would be applied to $20K sec 1250 recapture.

NOTE; any and all non-qualified use of the property prior to Jan. 1, 2009 will not be taken into account and is ignored for 121 exclusion treatment; only the non-qualified use of the property after Dec. 31, 2008 will affect homeowners.

#2;As mentioned above.

OK. Going back to my original question then, there is no 121 exclusion treatment available for my clients. They have depreciation recapture and then the balance of the gain is LTCG, correct?

The period for 17 months of the 60 months prior to selling it is neither qualified nor nonqualified use and it will not be included as non-
qualified use because of the exception that it is the period after the home was last used
as the principal residence but before the date of sale.

NOTE:regardless of how the property is being used, or even if it is not being used at all it is NONQUALIFIED use

you are CORRECT;even though you didn't live in the home for the 17 months of the 60 months. It still counts as a year of ownership as if it were qualified use.so 17/60=28.33% is qualified use.sorry my bad~~

No problem. I appreciate your help on this! It's pretty complicated and I couldn't figure it out. Thank you.