Tax Guru – Ker$tetter Letter

Q:

We owned our home for more than five years and had it rented until 9/1/05 when it become our primary residence?  The IRS is asking us how many days we lived in California?  Before I put the answer on my tax form I would like to know if we spent approximately tow month traveling to our second home in Texas will it disqualify us for the exclusion?  We had to sell the home because of financial reasons.  This property become our primary residence on 9/1/05 to 11/8/07.  We had all our mail there, utility bills, bank accounts and registered to vote.  Thank you for your help as I am worried about this.

A:

You really need to be working directly with a tax pro to make sure everything is handled properly rather than trying to work through the rules on your own.

You are obviously trying to see if you qualify for the ownership and occupancy test of two out of the previous five years in order to be able to qualify for the full tax free exclusion.  You seem to be confused as to whether visiting your second home doesn’t allow you to count that time as part of your time in the primary home.

As any competent professional tax advisor should be able to tell you, the occupancy rule doesn’t require that you actually be physically present in that house for 24 hours of every single day or even every single day that you are counting.  Real life for most people does include time spent away from their main home for various reasons, be they business, medical or purely personal.  As long as your primary residence is still considered your main base of operations, time you spend away temporarily at another location, including your own second home in another state, shouldn’t count against you.  As long as you don’t take any of the steps to change your official primary residency away from the one you have had, you should be able to count that time as part of your ownership and occupancy.

Besides dealing with this issue, you will also need the assistance of a good tax  professional to help you calculate the proper adjusted cost basis of your old home, including adjusting it for deprecation, to see if the exclusion will be enough to cover your paper gain.

Good luck.

Kerry Kerstetter

Follow-Up 1:

Thank you for your reply.  I will contact a CPA and have him do our taxes.  I appreciate your advise.  The only reason that I became paranoid is the form ask” how many days did you spend in California.”  We spent two years less about 90 days that we spent in our second home.

Follow-Up 2:

Thank you for your time in answering my question.  I have made an appointment with a CPA.
Sincerely,