Re: Under two year rule: J Hyre - Posted by Dave T
Posted by Dave T on May 13, 1999 at 21:39:21:
To use the capital gains exclusion:
During the five-year period ending on the date of the sale or exchange, the taxpayer must have owned and used the property as a principal residence for periods aggregating two years or more (Sec 121(a)).
If a taxpayer acquired his or her currrent residence in a rollover transaction, periods of ownership and use of prior residence can be taken into account in determining ownership and use of the current residence. Therefore, the holding and use periods prior to August 5, 1997, FROM A HOME THAT PREVIOUSLY USED THE PRIOR “ROLLOVER” PROVISION, may be “tacked on” or used in determining both the ownership and use test under the new exclusion provision [Sec 121(g)].
The ownership and use tests do not have to be met simultaneously. However, satisfaction of both conditions must occur within the five-year period ending on the date of sale or exchange. In other words, a tenant who purchases the home can count the time as a tenant as part of the use requirement. Also, a homeowner can rent out his or her home and still count that time toward the ownership requirement [Rev Rul. 80-172, 1980-2 CB 56].
Only one year is required for the physically or mentally incapacitated. The two-of-last-five-year rule was liberalized to include a taxpayer who, during the five-year-period (1) owns and uses the residence for at least ONE YEAR, and, (2) becomes physically or mentally incapable of self-care during the five years, thereafter residing in a state-licensed facility (including a nursing home)[Sec 121(d)(6)].
If the homeowner can not meet the two year rule, three exceptions still permit the homeowner to exclude some of the gain. Only a portion of the gain is generally taxable even if the taxpayer (a) cannot meet the two of last five years ownership test, (b) cannot meet the two of last five years occupancy test, or © has used this exclusion within the last two years. If the reason the homeowner cannot comply is because of (1) change of place of employment, (2) health, or (3) other unforseen circumstances to the extent provided in future IRS regulations [Sec 121©(2)], the taxpayer will still be able to exclude the fraction of the gain, the numerator being the shorter period of (1) the use period or (2) the period between the two sale dates, and the denominator being two years. The Tax Technical Corrections Bill of 1997 provides for a proration of the $250K ($500K MFJ) exclusion rather than the gain. This would permit $20,833 of the gain to be excluded for each MONTH a married homeowner meets the ownership, use, and “not-two-year” rules. In six months, the allowable exclusion would be $125K.