Q:

Subject: Primary residence tax exclusion Safe Harbor

 

Tax Guru,

Saw the articles on 'Safe Harbor' when selling a primary residence but see if you can answer this.  I have a rental property which I would like to move back into to get the 500K married couple no tax benefit.  This property is 15 miles south of where I live now.  Here's the problem ; in order for me to live in that property and commute to work this must be done via freeway.  I have owned the property for 10 years but have since come down with a phobia about driving on freeways.  One to Two exits on a freeway and then I begin to get panic attacks while driving, therefore I have been treating myself by avoidance of using freeways.  To move back into this condo would cause me to have to commute via freeway which I physically can't do.  How can I get a tax break if I can't live there without losing my job due to my phobia of driving on freeways.   I don't fit the Safe Harbor's as described !

Help ......

A:

I can't tell if you are trying to make a joke with this premise or are serious.

Giving you the benefit of the doubt that you are honestly trying to apply the health exception to the two year residency rule, such an argument would fail miserably on at least two counts that pop immediately to mind.

1.  The law allowing a sale in less than two years for health reasons is intended to cover health issues that arise after you begin living there; not something that you know full well about and are suffering from before taking up residence there.

2.  Even if you could justify using the pre-existing medical condition as a reason for selling before two years of personal occupancy, that only allows you a pro-rated tax free exclusion, not the full $500,000.  For a couple, that works out to about $685 of tax free gain per day of occupancy ($500,000 / 730).  If you never actually use the home as your primary residence, you have zero qualifying days of occupancy, which would give you an allowable exclusion of zero.

As I constantly have to remind people, I do not make the laws.  I do admire creative interpretations of the details and loopholes that are part of those laws.  However, your little stab at it here just doesn't even come close.

If you truly do have $500,000 of potential gain in that rental property and want to dispose of it, you should be seriously evaluating using a 1031 (aka Starker) exchange to defer all or even part of the profit into other property or properties.   You can see the rules for that strategy at various sites around the web, including my wife's company,Tax Free Exchange Corporation (www.TFEC.com).

Good luck.

Kerry Kerstetter

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/16/2005 12:29:00 PM Send this post: