Capital gains tax when buying another primary home before selling rental property

[FiremistSLK]

What is the name of your state? RI

When I moved from NJ to RI two years ago, I rented my house in NJ while looking for a house to purchase in Rhode Island. I purchased another house in RI last year and sold my NJ house this year. Do I qualify for an exemption to the capital gains tax since I owned the RI house before I sold the NJ house?? I lived in the NJ house for three of the last five years.

 

[HRZ]

The NJ home qualifies for the exemption ....however the depreciation for the time it was rented must be recaptured ...even "if" you forgot to claim it earlier .
( assuming you owned the NJ home for the required times as well)

 

[Taxing Matters]

What is the name of your state? RI

When I moved from NJ to RI two years ago, I rented my house in NJ while looking for a house to purchase in Rhode Island. I purchased another house in RI last year and sold my NJ house this year. Do I qualify for an exemption to the capital gains tax since I owned the RI house before I sold the NJ house?? I lived in the NJ house for three of the last five years.

The way the rules work you must have both lived in the home as your primary residence for and owned it for at least two of the five years immediately preceding the date of sale of the home to qualify for the full capital gain exemption. But because you did not live in it for all of the five years, that maximum gain gets prorated for the part of the last five years that you actually lived in the home. So you will have part of your gain allocated to the rental period and the gain exemption does not apply to that. In addition, you will have depreciation recapture. That too cannot be covered by the capital gain exemption. IRS Publication 523 explains all the rules that apply when selling your home.

 

[HRZ]

I read it in context of any 2 out of last 5 years was one criteria for full exclusion ...and op met that criteria?

 

[FlyingRon]

But because you did not live in it for all of the five years, that maximum gain gets prorated for the part of the last five years that you actually lived in the home.

Say what? Where does that come from?
They have to prorate out the non-qualified (i.e., rental period) but there's no need to prorate the exemption because they didn't live there five years.

There's not enough information in the original post to determine if the NJ house meets the 24/60 principal residence test.

The only other proration would be if they didn't meet the 24 months and had a qualifying reason for moving. Then they might get a partial on that.

There's no indication as to whether or not they had 24 months fo principal residence in the NJ house before they moved which is the big question.

 

[FiremistSLK]

Thanks all for the quick reply... I purhased the NJ house in 1987 and lived in it the entire time. I moved to RI on November 30th, 2015 and rented the house to my friend beginning on December 1st, 2015. She moved out 27 months later in February 2018. I then sold the NJ house on May, 20th, 2018. That means I lived in the house for 30 of the 60 months prior to the sale. I purchased the Rhode Island house in August 2016.

 

[LdiJ]

Say what? Where does that come from?
They have to prorate out the non-qualified (i.e., rental period) but there's no need to prorate the exemption because they didn't live there five years.

There's not enough information in the original post to determine if the NJ house meets the 24/60 principal residence test.

The only other proration would be if they didn't meet the 24 months and had a qualifying reason for moving. Then they might get a partial on that.

There's no indication as to whether or not they had 24 months fo principal residence in the NJ house before they moved which is the big question.

Taxing Matters is accurate on this. The law changed a while back making it so that you had to allocate the capital gain on a prorated basis between the rental period and the personal residence period. Had the house just sat empty, that would not be the case, but because they turned it into a rental, it is.

Also, the OP said very specifically that he lived in the house 3 of the last 5 years.

 

[FlyingRon]

The OP said nothing of the sort (at the time I made my post, at least which is why I asked).

I now understand TM was saying "not living" meaning "renting out." I quite well know about the non-qualified use proration (I mentioned in the post you quoted). "Not living" is not the operative part. "Being used for rental" is (as it is a non-qualified use).

 

[Taxing Matters]

Say what? Where does that come from?
They have to prorate out the non-qualified (i.e., rental period) but there's no need to prorate the exemption because they didn't live there five years.

You are right, they have to prorate for the period during ownership of the home that the home had a nonqualified use. The code defines nonqualified use as "any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer's spouse or former spouse.” IRC § 121(b)(5)(C)(i). There is an important exception, though, which I discuss below.

I now understand TM was saying "not living" meaning "renting out."

Not exactly. I specifically referred to the period they were not living in the home rather than the period it was rented out because, as cited above, the Code defines nonqualifed use to mean the period that you are not using it as your principal residence. Thus, it is not the period of rental that technically matters for defining a period of nonqualified use, it is the period they were not living in the home as their principal residence.

Now there is an exception to the period of nonqualified that excludes the period during the last five years that is AFTER the taxpayer last used his home as his principal residence. So had the OP simply moved out and left the home vacant up until the sale that period between moving out and selling it would not count against them. But there is a further exception that then brings back in the period used as a rental.

Given the follow-up the OP provided it will come down to the rental period being what is prorated. But I did not have those facts when I first replied. Had there been some period where there were not living in the home as their principal residence, then they moved in again and later made the final move out, that earlier period of vacancy would count against them. Not a common fact pattern to be sure, but one that is possible to occur. So I used the basic definition of nonqualified use that the code does in referring to periods when they were not living in the home rather than simply saying it is the period of rental because in some situations having the home vacant can count against you.

 

[FlyingRon]

Yes, but I interpreted "not living" to mean "not owning" This is where the confusion occurred, sorry.

 

[FiremistSLK]

Thanks again everyone. I understand now. BTW. The two and a half month period between when my tennent moved out (February 28th) and the date of sale (May 20th), the house was empty. I never again lived there after I left for RI on Novemner 30th, 2015.

 

[LdiJ]

Thanks again everyone. I understand now. BTW. The two and a half month period between when my tennent moved out (February 28th) and the date of sale (May 20th), the house was empty. I never again lived there after I left for RI on Novemner 30th, 2015.

I am not sure that you do understand. Pleased re-read the thread. You are going to have prorated capital gain/loss plus depreciation recapture for the period that the home was a rental

 

[FiremistSLK]

Yes, I do understand that I am going to have a prorated capital gain/loss plus depreciation recapture for the period that the home was a rental and there will be some capital gains tax assesed. But before I asked this question, I was under the impression that I would not be assessed any CG tax. Thanks again to all for clearing this up for me. JOHN