Do you need to own your home 2yrs or 5yrs to qualify for tax-free capital gains?

Question

My dad sold his home after living there for 20+ years and bought a condo.  6 months later he sold that condo and bought a bigger condo for slightly more money (no capital gains at all with that sale).  He's now lived in this last condo for 2 years but needs to sell it because we have to move him into assisted living. (He's lived by himself for all this time).  We were told by his accountant that he would avoid the capital gains tax if he occupied his home for at least 2 years.  But I've read some articles that say one has to own the home 5 years and occupy it for 2 of those years.  What's the right anwer??

AngeloElectro · Accepted Answer

Since your father lived in his home 2 years, he will be allowed an exclusion of $250,000 of capital gain from the sale of his house.  He also qualifies for an exclusion because the sale is due to health reasons (you say he needs to move to assisted living facility). 

"A sale will be considered because of health if the primary reason is related to a disease, illness, or injury of a qualified person. If a physician recommends a change in residence for health reasons..."

http://www.irs.gov/newsroom/article/0,,id=105042,00.html

Since he qualifies due to medical reasons, if he had lived in the home for less than two years, the exclusion amount could be pro-rated.  The example given in the article:  If he had lived in the home only one year instead of two, his exclusion would be 50% of $250,000 or $125,000 of gain.

He only has to report gain on his tax return in excess of $250,000.  If he itemizes, he should still include real estate taxes, mortgage interest, and other allowable deductions on his Schedule A.  If he realized a capital loss due to the sale of his home, unfortunately, the loss is not an allowed deduction.

Anonymous · Answer

The accountant told you right, occupy as principle place of residence for 2 of the last 5 to avoid capital gains.

E B · Answer

In Virginia, you do not have to pay capital gains if you've LIVED in your home for at least 2 out of the last 5 years.

Judy · Answer

You have to own the home for two of the five years prior to the sale, and also occupy it for two years of the previous five (don't have to be the same two years), to avoid paying capital gains tax.  You definitely do not have to own it five years.

Process Guy · Answer

The law reads you must live in the home as your primary residence for two out of the past five years.  That means only two years, but it also means that if you live there for two years, than rent it out for three years, you would still qualify for tax exemption as long as you didn't sell another tax exempt primary residence during that period.

Anonymous · Answer

It's not 5. Just call the IRS, seriously, they are not always out to get you.

Anonymous · Answer

no capital gains applies if it is your only home, even if you had it only 72 hrs.. it just needs to be your permenant residence

pk39allstar · Answer

my mom says that could be true

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Do you need to own your home 2yrs or 5yrs to qualify for tax-free capital gains?

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