2 out of 5 year rule for primary residence to avoid cap gain

[Deleted]

A man who is a US citizen living in australia with his live in girlfriend of 10 years purchased an investment home in his name only in Las Vegas in 3/2010 for 155k.  He rented it out from april 2010 thru November 2012. He then moved into the home 12/1/12.  His girlfriend moved to Vegas from Australia and has lived in this same home since February 2013.  They were married in November 2013.  He is unable to find suitable employment in Las Vegas and is returning to Australia to rejoin his old job and will remain there for the next 5+ years. The home has gone up in value and is worth about 220k.  The Wife is staying in Vegas at the home for at least a few more months before she also retuns to Australia.

He has owned the home for 2 of the last 5 years but he only lived in it for 14 months. The wife has lived in the home for 12 months now. She was not married to the husband at the time of the purchase however they were living together and commingled their finances. How long must the wife stay in the home before selling to avoid any capitol gains on the sale of this home?

Do not know if this is a factor but the wife is an Australian citizen in the process of becoming an American citizen.

[taxref]

I did not do any research on this, so be sure not to take this as the final word on this situation.  

My opinion is that they would not be able to claim a 121 exclusion on the sale of this property, at least for 7 years to come.  The taxpayer's primary residence (and tax home) is not in Las Vegas, rather, it is in Australia.   The 121 exclusion is only for the sale of ones primary residence.  After he returns to the home in 5 years time, he can then start with the 24 month period of residency.

You do not mention if the wife is working in this country, which could be another factor to consider.  I am making an assumption that she cannot yet legally work here, so if she is working that may change things.  

[mwcpa]

another issue.... there is "non-qualified" use... no matter what some capital gain will be due....

from 3/2010 until 11/2012 there was an non-qualified use, therefore that period is tainted... so, assume the 2 out of 5 was met by 11/2014.... and the home was sold....

the home would have been owned for 56 months... 32 months are "non-qualified" (it was rented).  therefore, if there is a gain, 32/56 would be taxable at a minimum....

[taxref]

"...but I have lived in the house for 20 years and it was considered his primary residence even though they established residency in other countries too so he was able to travel back and forth and not have to stay out of the country the 200 something plus days each year."

I see a potential problem there.  If you received a favorable tax position by claiming to have a primary residence overseas, it will be a very hard sell to suddenly undo that.  If that tax position did not include the overseas home as a primary residence, you would probably be okay.

Here in NJ, there is a rather large group of people called "snowbirds."  They are retired people who have 2 homes, one in NJ, and the other in Florida.  They winter in Florida, and then return to NJ during the summer months.  The vast majority of snowbirds claim Florida as their residence, mostly because FL does not have a state income tax.  When snowbirds tire of the travel, they usually sell their NJ home and retire to FL full time.  That is when the problems start.

Even though they claimed to be FL residents for a number of years, they suddenly want to exclude gain on the sale of their NJ home.  They then want their tax preparers to count them as NJ residents for the prior 2 years.  Of course, they cannot whipsaw (taking opposite positions on documents they signed under oath) simply because it benefits whatever their current situation is.



  

[mwcpa]

I concur with the ref on this situation raised by broker.... you need to see a professional to review the rules....

it seems you lived in the home for the entire 20 years... if so, you may qualify for an exclusion.... your husband on the other hand may not....