How do you determine date of residency in terms of capital gains tax?

Question

I lived in my house for seven years. I moved in with someone else, gradually, over several months, while I was fixing up my house to put it on the market to rent. I changed the address on my driver's license at some point during that time and filed a change of address form at some point and eventually put the house up for rent.
Now I'm thinking about selling the house.
I know that to avoid capital gains tax on a property you have to have lived there for two out of the past five years, but how do I determine when that was? Do I go by tax return, date I rented it out, driver's license, change of address form...or what?

Answer 1

The date it ceased to be your main residence is a matter of fact. Utilities are often a good rule of thumb but is that going to work in your case?

You say you gradually moved in with someone. If it is true to say that you stayed with your friend off and on whilst undertaking certain works (refitting a bathroom or kitchen) then you might be able to argue that you still lived there until the day you never went back to live. In any case, the day you rented it out is absolutely the last day you could have lived there, by definition.

This is too big to get wrong. Perhaps you should seek half an hour with a CPA and see if it is worth getting professional help for this year's return.This question will only be resolved by getting specific details down and that is best done in a face-to-face meeting.

Answer 2

Under IRC 121, the two of five year test is counted using individual days in which the house is your principal residence. Since you need 720 days out of the last 5 years, you can count any 720 days. Therefore, the two years that you lived in it during the last five (2002-2007) could be the 2002 and 2003 years.

It sounds like you will be ok if all of your movement was recent and not great lengths of time.

Treas. Reg. 1.121-1(c)(1) The requirements of ownership and use for periods aggregating 2 years or more may be satisfied by establishing ownership and use for 24 full months or for 730 days (365 x 2). The requirements of ownership and use may be satisfied during nonconcurrent periods if both the ownership and use tests are met during the 5-year period ending on the date of the sale or exchange.

Treas. Reg. 1.121-1(c)(2)(i) In establishing whether a taxpayer has satisfied the 2-year use requirement, occupancy of the residence is required. However, short temporary absences, such as for vacation or other seasonal absence (although accompanied with rental of the residence), are counted as periods of use.


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Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.

Answer 3

usually by utilities. use what works best for you if it is reasonable.