Convert and Flip

Today TaxMama hears from Paul in Florida, who says “I have a friend whose apartment community has been converted to a condominium. He and his wife are going to buy their unit, which has been their primary residence for over two years. They intend to resell the condo as quickly as possible after purchasing it for a quick profit.

I told them to look into the possibility that they might be able to exclude the gain because they had rented for over two years. I have a tax guide (2006 TurboTax Income Tax Handbook) that states (page 159): “When calculating the gain on the sale of your home, the use of your home can include time when you rent.”

I cannot find anything authoritative that supports this statement. I have a suspicion that this may only satisfy the primary residence use test and not the ownership test. What is your take on this?”

Hi Paul,

Good try, but, nope.

They have to live in it AND own it for two years.

OR, as a general rule, at least one of them had to own it and live in it for two years. Then, the other one could have been a live-in lover or friend for the two years without owning it before getting married. Once they get married, the ownership period of the first spouse would count for the new spouse.

Does that make any sense?

In other words, they would both have satisfied the resident test. Only one would have satisfied the ownership test before marriage. But once they got married, they’d both get credit for owning the place for two years or more.

The rental period referenced in Turbo Tax is talking about refers to renting it out to others while they own it. Actually, it could include time when they rented it, too. You’re right. But that IS just for the use test. They still have t also o own it for two years to be able to use the $500,000 exclusion.

If your friends want to flip it for a quick profit and pay the taxes, actually it might not be such a bad idea. Two years from now the value might be lower, the way the market is going. This way, at least they’d still have some cash from the profits to buy something they want to stay in.

And remember, you’ll find answers to questions about capital gains and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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