Let’s start with the basics. If you live in your primary residence for 2 of the previous 5 years, you can take a capital gains exclusion of up to $250,000 if you’re single and $500,000 if you’re married filing jointly.
It gets more complicated from there.
I received this question at USTaxaid.com and it had a unique set of circumstances. What do you think? Will they get the capital gains exclusion?
We purchased a condominium in the USA 22 years ago while living overseas. We used the condo as our home base every summer (about 8 weeks per year) when we came back to visit family in the USA; we never rented it out to earn income. While we lived overseas, our employer provided housing. We moved back to the US in June 2021 and are now selling the condo (May 2022) because we have purchased a home. Capital Gains on the sale of the unit will be about $90,000. Will we owe Capital Gains taxes?
Answer: The first question has to do with whether this property was your primary residence.
For 21 years, you lived in a rented property and visited 8 weeks a year. While the US property wasn’t rented out (so not an investment), you’d be hard pressed to call it your primary residence. If it’s not an investment and it’s not your primary residence, it’s a second home.
If you had instead worked overseas for shorter periods and then come back to the US for longer periods of time, you could claim that you had a temporary absence. Temporary absences need to be less than a year. And then you’d need to come back long enough to demonstrate that your US home was meant to be your primary residence.
Since it’s not going to qualify as a primary residence, you won’t get a capital gains exclusion.
A Possible Strategy
The property has only been a primary residence for a year or so. Can you qualify for selling it due to unforeseen circumstances?
You will need to pro-rate the capital gain exclusion if you take this approach.
What if you instead decide to live in the house for 2 years to get the 2 out of 5-year exclusion?
Because you haven’t rented it, you will not need to prorate the gain. Instead, you’ll get the full capital gains exclusion amount. If you’re single that’s $250K or if you’re married filing jointly that’s $500K.
This is a good example of strategy first, and then implementation. If you can take advantage of the right tax law, you may save a whole bunch of taxes.