Discussion:What is "Nonqualified Use of Home?"

Client has condo in Atlanta bought in 2005 after her last house sale; she has a second residence in New Jersey that has been hers for many years. She plans to move to the New Jersey house early in 2009, and will live there two years before selling it. She will keep her Atlanta condo vacant and will return there after the house in NJ is sold.

Most of the discussion with this provision concerns converting to rental, an obvious nonqualifed use of the residence, but does leaving it vacant meet that same definition? Or having siblings live there?

As long as the two out of five is met, then going from personal residence to rental is still okay - not from rental to personal.

There is provision for up to a two year absence for employment, health, and other unforeseen circumstances and perhaps others as future Regs. may permit.

Finally, it appears that an office in home would not be considered non-qualified use upon sale since it is considered one sale.

"For purposes of determining periods of nonqualified use, (i) any period after the last date the property is used as the principal residence of the taxpayer or spouse (regardless of use during that period), and (ii) any period (not to exceed two years) that the taxpayer is temporarily absent by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances, are not taken into account."

It is oddly written. The way I read it, if she never moves back into the condo, then it could've been rented or whatever, and because it followed the last use as principal residence, it wouldn't be considered a nonqualified period. But the minute she moves back in, then the two years she left it vacant do become nonqualified use, reducing her excludable gain once she eventually sells. And it seems like that carries on forever, so say she owns it 20 years, and lived there the first 4 and last 14 (with it vacant the two years she was in NJ). Seems she's still got to subtract 2/20 (10%) of the gain from what she can exclude.

Now, I’ve been assuming that her purpose for living in NJ for two years is to make the NJ house eligible for Sec. 121. If it’s some other reason, something that might qualify for one of the “temporary absence” exceptions Solomon mentioned, that might give you some more room to play, especially with regard to the issue of moving back into the condo.

Tril is right; once there is NQ use after 1/1/09, it will always be with you even if she moved out at the end.

I've got a client who put their home on the market two years ago (they owned for 30 years), bought a new home to downsize and still haven't sold their home vacated 2 years ago. In AICPA conference materials from Sidney Kess it clearly states on the bottom of page 5 that "Similarly, if the home remains vacant after the taxpayer relocates to another home, this will not affect the exclusion."

http://conferences.aicpa.org/materials/downloads/2008/LJ_Aug11_08_Revised.pdf

Is this everyone's understanding as well?

I stand by Trillium's quote from the technical analysis. Cuz it's right.

If Mr. Kess had written "Similarly, whether the home remains vacant, or is rented out, or is used as a second residence, after the taxpayer relocates to another home as his principal resicence home, this will not affect the exclusion period of nonqualified use if the taxpayer doesn't move back into the home before it's sold" he would have illustrated the exception to the general rule for any period of non-principal residence use that's *not* followed by a period of use as principal residence. I'm trying to write this before my third cup of coffee and the result is ... what you get is what you get.

Read the statute. It's perfectly clear there that vacancy is just like rental is just like second residence is just like letting the kids stay there. It's "nonqualified" unless it meets one of the exceptions, and that's what Mr. Kess was trying to write, but failed to. Loose lips. He will fix it when he reads this. We know he will.

Coffee. Now. More.

"Example 2.–Assume that an individual buys a principal residence on January 1, 2009, for $400,000, moves out on January 1, 2019, and on December 1, 2021 sells the property for $600,000. The entire $200,000 gain is excluded from gross income, as under present law, because periods after the last qualified use do not constitute nonqualified use."

Therefore, do we all agree now that if a property has always been a principal residence and is put up for sale, the vacancy period prior to its sale will not be considered nonqualified use?

And besides, the Example that you quoted doesn't say *anything at all* about how or whether the home was used or was vacant during the period that the taxpayer moved out... Eh?

By the way, at a seminar an example was given of someone buying in 2006 as rental, holding it as rental until 2012 and then converting to personal and selling after two years. Here 3/8th (2009-2011) would be non-qualified used, but if he then rented it out again for two years in 2015, the percentage would drop to 3/10.

I just got back from a Spidell seminar where the instuctor insisted that rental use after the last primary residence use would be considered non-qualified use. When I questioned him after the seminar and showed him the text he stated that there was an example that proved his point. I have re-read everything I could find on this and can't find his example. Now I have a bet with a colleague on this.

Taxpayer buys home on January 1, 2009. Lives in it for two years, rents it (or lets his kids live in it or leaves it vacant or...) for 2 years and sells it for a 200k gain. I think that this would be 100% excludable except for the depreciation. Thoughts?

I wrote that a whole bunch of things "don't affect the exclusion" when, in reality, they *would* affect the exclusion. What they *don't* affect is the period [number of days] of nonqualified use. As pointed out in a later post [Thank you, D&T] the rental/vacancy/non-principal use of the home after the last principal use will - ceteris paribus - increase the denominator of the ineligible-for-the-exclusion fraction and will thereby lower the percentage of nonqualified use, and increase the portion of the gain that *is* eligible for the exclusion. Of course, the selling price of the house - and the total gain - might change during that time, too...!!!

This is complicated. It deserves a beer. Mine's a PBR. What's yours?

Sidney, are you out there??

And *every* time someone posts that they "can't sell the house because their local real estate market stinks" I have to bite my tongue. They can't sell their house because the asking price is too high, seems to me.

Sorry, no. The gain can all be excluded (except for the depreciation part) because the owners have to *move back into* the house after the rental for the rental to be a "period of nonqualified use". As quoted above in this thread, "...because periods after the last qualified use do not constitute nonqualified use."

And, also, too, in addition, as well, in your example, the house was owned for eleven years, not ten. Oops...?

From the JCT: "For purposes of determining periods of nonqualified use, any period after the last date the property is used as the principal residence ... [is] not taken into account."

You gotta *move back in* for the nonqualified use to cut into your exclusion.

http://www.natptax.com/ask_natp_research.html

and we know that the IRS reads the threads here.

Thank you.

Harry Boscoe SSN 231-62-5959

more §121 attention by NATP -- not related to non-qualfied use discussion, but still worth looking at