I live in Washington and own a house in California. I want to sell my home and I need to know if there is a reason to wait until Jan. 2018 for tax purposes.

I moved to WA in Jan 2015 so I am still in the window "must live in the home at least two of the last five years" in order to receive the full 500k capital gains benefit.

Home is expected to sell for about 800K. Purchased in 1991 for 242K.

here is what my tax guys reports:

Finally, when you both were in the other day and we were discussing the rental in California and you possibly selling it I wanted to inform you of a IRS regulation that is in place as it pertains to rental and using the 2 out of 5 personal residence exclusion on the federal level. Because it is a business property (rental) and you don't intend to move back into the residence then you cannot receive any rental income from the property in the year of the sale. Therefore you don't want to sell the property in 2017 as you will miss out on the exclusion rather you would want to plan to vacate the residence in late 2017 and sell it in early 2018 assuming that you are still within the 2 of 5 timeframe. I had a client almost get burned by this regulation so I thought I would make you aware for your future planning.

Here is the excerpt from the regs for your reference:

Determine whether the business or rental space still counts as a business space. A space formerly used for business is considered residence space if ALL of the following are true:
You weren’t using the space for business or rental at the time you sold the property,
You didn’t earn any business or rental income from the space in the year you sold your home, and
You used the space as residence space for 2 years out of the 5 years leading up to the sale.
If all of these are true, your business usage DOESN’T affect your gain/loss calculations.


Thanks!