Q: My husband and I are planning to retire in Santa Fe. We switched between homes in Tulsa, Oklahoma and Scottsdale, Arizona. We are what they call “snowbirds” in Arizona, and that means we spend roughly half of our time in Oklahoma and the other half in Arizona. We have owned the Oklahoma home for 21 years and it has been our only residence for most of the time. We bought the house in Arizona about seven years ago. We expect to sell both homes and buy our last home in Santa Fe. My question is how to use the $ 500,000 exclusion on profit from the sale of a main home. Our two current homes pass the IRS 2 of 5 year property test. The Tulsa home should have about $ 320,000 in profit and the Arizona home could actually exceed $ 500,000. We could probably keep one of the homes for another two years if both of them qualify for tax exclusion. If not, we’d prefer to apply the exclusion for the Arizona home. We’re both over 55 if that matters.
A: The exclusion assumes that the property was your “primary residence” for two of the five years prior to the sale. You can only have one “main residence” at a time.
This $ 500,000 exclusion was waived in 1997. It replaced previous rules that allowed you either to defer gains from appreciation or to exclude gains when you were 55 years of age or older. There is now only one rule and age does not affect eligibility.
They suggest that you’ve used the two houses roughly the same in the past five years. If you sell both now, only one can be the primary residence for the foreclosure.
If you can claim the Arizona property as your primary residence, it also means the Tulsa property wasn’t. To claim exclusion twice, you would need to have your Tulsa property as your primary residence for at least two years prior to sale.
I assume that your description of use is correct. Under the right circumstances, someone could qualify one property as primary residence for two years and then another property for the next two years. Both could then be eligible for exclusion.
There is a separate regulation that the exclusion can only be asserted every two years. Even if both properties could be eligible, selling them at the same time will not result in two exclusions.
When this exclusion was created in 1997, legislative history made it clear that the definition of “primary residence” has not changed from previous law. The previous law is based on facts and circumstances.
The regulations provide further guidance. First, for someone who moves between two houses during a year, the house they spend most of their time in that year is usually their primary residence.
This definition has been criticized because there are legal proceedings in which one property can be the primary residence for five months and the other seven months, all within the same year. The ordinance stipulates that a main residence will be determined from year to year.
To be fair, the regulation says the majority of the time is “normal” how to determine primary residence status. The regulation also lists other factors to consider.
Relevant factors include where you work, where your family members live, where to go for federal and state tax returns, the state in which you have a driver’s license and register your cars, and where your voter registration is located.
Other factors include the mailing address for correspondence, the location of banks (may be less important in interstate banking), and the location of any religious or recreational organizations with which you are affiliated.
I am asked this question every few years, and I often tell my clients that the factors are similar to those a university would use to determine if you qualify for government coursework. My point is simply to point out that the factors are fairly standardized and logical.
If you sell both homes this year, use the factors above to determine as best you can which one is eligible for exclusion. Even if challenged, you win on any of the sales.
Jim Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected]