Jump to content
The forums have been archived and are now read only. Years of great info saved for your reading pleasure. Thank you! Visit us on Facebook: https://www.facebook.com/NakedInvestor/ ×
The Naked Investor Forums
happyardy

Tax-free Gain On Sale Of Your Principal Residence

Recommended Posts

Hello,

I have read that you can deduct $250K(if you are single) and $500K(if you are married and filing jointly) of gain on the sale of a home you have lived in for 2 years of the past 5 years.

My question is that do I have to own the house or just living(renting) in it for 2 years is fine ? Say, I am living as a tenant/buyer with a lease for 2 years and an option to buy. After I am done with my lease for 2 years, I decide to exercise my option and do a simultaneous closing with another buyer who pays me all cash. Can I still avail of the principal residence tax-free gain loophole ?

I guess I cannot avail of this loophole if my buyer is a tenant/buyer.

Please let me know if my understanding is correct.

thanks & regards

- Ardy

Share this post


Link to post
Share on other sites

Under Section 121 or the Internal Revenue Code, up to $250K in sale profit per taxpayer can be excluded from capital gains taxes on the sale of a primary residence provided:

  • the taxpayer has owned the property at least two of the five years prior to the sale,and,
  • the taxpayer has occupied the property as his primary residence at least two of the five years prior to the sale, and,
  • the taxpayer has not used the capital gains exclusion for a previous home sale within the 24 months prior to the sale.

For a married couple filing a joint tax return, only one spouse actually needs to be on title, but both must meet the other requirements to qualify for their combined maximum exclusion of $500K.

 

To qualify for the Section 121 capital gains exclusion, you must both OWN and OCCUPY the property as your primary residence at least two of the five years prior to sale. Only when you meet the two year requirement for ownership AND the two year requirement for occupancy, can the capital gains exclusion be applied to the profit from the sale of your primary residence

 

The ownership and occupancy requirements do not have to be met concurrently. For example, let's say that you rent a house with an option to purchase in 24 months. During the two years you are living in the house, you are a renter with an option to purchase. At the end of the two year period, you decide to exercise your option to purchase but decide to move into another house. You turn the property you bought with your purchase option into a rental property for another two years.

 

The occupancy clock started at the beginning of your lease option period. When you exercised the option and became the titled owner, you started an ownership clock. After two years of operating this property as a rental, you decide to sell the property to your tenant at a fair price. At this point in time, we look backward to see if you qualify for the capital gains exclusion. We only have to go back 48 months though the lookback window incorporates the 60 months prior to the sale.

 

You lived in the property as your primary residence during months 1 through 24 as a renter. You owned the property during months 25 through 48 as a landlord. Now when you sell the property anytime between months 49 to 60, you will have met the two (of the prior five) year ownership and occupancy requirements to qualify for the Section 121 capital gains exclusion.

Share this post


Link to post
Share on other sites

Dave,

Thank you very much for that excellent explanation. It is very clear now. I appreciate it.

regards

- Ardy

Share this post


Link to post
Share on other sites

×
×
  • Create New...