One-Time Home Sale Exemption Rules Complex

Aside from reduced prices at the movies, one of the major advantages of reaching middle age is the once-in-a-lifetime $125,000 exclusion on the sale of a primary residence, offered to those 55 or older.

To qualify - the savings can be significant - the home must have been the taxpayer’s primary residence for three out of the past five years.

However, this test can be confusing if a taxpayer owns more than one home.

For example: In 1980 John Lawson, a resident of New York, purchased a South Florida home so he could take a break from winter, from mid-December until the end of January.

Each year, as his tolerance for New York winters diminished, he extended his Florida visits; he now comes down in early November and stays at his condominium until mid-May.

And he has decided to move permanently to Florida, to take advantage of the 55-and-over tax break. He wants to sell his greatly appreciated New York home. Unfortunately, even though he pays New York state income tax and qualifies in every way as a New York resident, the IRS will say that the Florida condo is his primary residence.

To qualify as a primary residence, the home must be occupied by the taxpayer for more than half the year.

Typically, a snowbird’s northern home has been owned for many years and has greatly appreciated in value. When this home is eventually sold, the taxpayer will realize a substantial gain.

But how will the IRS know how many days you live in Florida?

The answer is simple: The IRS does not have to prove how many days you lived in Florida. You have to prove that you lived in your northern home for most of the year, and you have to prove it was your primary residence for three out of the five years prior to the sale.

Thus the real question becomes: “How can you, the taxpayer, prove how many days you lived in the northern home, compared to in the Florida vacation home?”

Saving monthly itemized bills from the telephone company and gasoline charge card statements will help prove where you were on a given day.

Otherwise, it might be necessary to obtain affidavits from neighbors.

Let’s say that Lawson sits down, analyzes his back-and-forth living arrangements for the past five years and comes to the unpleasant conclusion that his greatly appreciated New York home does not qualify as his primary residence.

In 1996, 1995 and 1992, he lived in Florida for the greater part of the year. However, in 1994 and 1993, he was in New York for more than six months each year. If he sells now, he will not qualify for the $125,000 exclusion. But, if he changes his 1997 vacation plans, stays in the New York home for the greater part of the year and documents the precise number of days, the home will again qualify as his primary residence because it now meets the three-out-of-the-last-five-years test.