Real Estate Capital Gains Exclusion

What is the name of your state? Illinois and Indiana

I would like to know if we (wife and I) qualify for the capital gains exclusion on our home sale.

Here`s the story...
(1) Bought the house in April 1998 near Chicago
(2) Got transferred to Brasil in June 1999 - but kept house
(3) Rented house on March 2000 until April 2003
(4) we want to sell the house as we are being relocated back to the USA to Indiana.

Do we meet the 2 out of the last 5 years intent? Housing is cheaper in Indiana and we would like to buy for less than we sell....which is different than the way it used to work to avoid gains taxes.

Tx

[abezon]

You don't meet the 2/5 year use test because you didn't live there for 2 full years during the 5 years before you sold the house. However, you *might* qualify for a reduced exclusion.

When you left for Brazil, did you intend to return? Did you think you'd be returning to Chicago & your old house? If so, & you now find out you're returning to Indiana, you could argue that the house is being sold due to a change in work location. This is an aggresive position to take & the IRS may not agree if they look at your return.

You'd be able to exclude xxx/720 of the gain, where xxx is the number of days you lived in the house during the 5 years prior to sale. Obviously, if you sell in August, the days you lived in the house from 4/98-7/98 don't help you.

Even if you can exclude the gain, you will still have to recapture the depreciation you've claimed (or could have claimed) since turning the house into a rental. If you haven't claimed depreciation, amend your 1999-2001 returns immediately!

Thanks for the speedy reply. We absolutely did plan to return to our house at the end of the assignment, and given a choice, we still would.

Let`s put some numbers to this. Assume the capital gains are roughly $70k and we lived in the house for 1 year. Exclusion max is $500k, which is prorated to $250k. Our 70K is less, so we`re ok, even using the one year, right?

For the rental period, we did claim the depreciation.

Tx.

[abezon]

Actually, the Schedule D looks like this:

Long Term Gains & Losses
Description: Bought: Sold: Proceeds: Cost/Basis
Residence: 04/03/1998: 07/14/2003: $270,000: $200,000
Sec 121 excl.: 07/14/98: 07/14/2003: $0: $52,738


$52,738 = $70,000 - the total depreciation you claimed since 5/1997 ($17,262).

Your net gain = $17,262. This is recaptured at a maximum tax rate of 25%.