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Dear Tax Talk,
My wife and I currently have 2 residences:

  1. A home in Pennsylvania occupied as a primary residence from 1974 to 2010 (36 years) and used as a second home since then.
  2. A home in Florida purchased in 2004 and used as a rental property from 2004 to 2010, then as our primary residence from 2011 to the present.

I am considering selling the Pennsylvania house. As you can imagine, the house has had significant appreciation since we first built it. Do I have to re-establish residency in the Pennsylvania house to avoid federal income-tax consequences, or does the 36 years as primary residence allow any adjustment to the capital gains?
— Wayne

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Dear Wayne,
Several requirements must be met in order for you to exclude the capital gain from the sale of your home in Pennsylvania. One is that you must have used the home as your primary residence for 2 out of the previous 5 years of ownership before the date of the sale. In your situation, it seems you have not met the requirement and you may want to consider re-establishing Pennsylvania as your main home.

Interesting enough, the 2-year period can be at any time during the 5-year period before the date of sale. It does not have to be a single block of time. The IRS further breaks it down: Exactly 730 days of residence is required to meet the test.

Facts and circumstances

For people who own more than one home, the IRS determines where your main home is by applying the “facts and circumstances test.” The major factor is where you spend most of your time.

Additional factors include your mailing address, as well as the state in which:

  1. You are registered to vote.
  2. You file federal and state tax returns.
  3. You have your driver’s license.
  4. Your autos are registered.
  5. You work.
  6. You bank.
  7. You belong to religious and recreational clubs.

If I were you, I would go back and carefully check my records to determine what the exact dates were when you established residency in Florida, especially if you went back and forth between Pennsylvania and Florida frequently over the years.

The capital-gains exemption — the amount of gain that you can exclude from taxation — is $250,000 for individuals or $500,000 if you are filing a joint return. So you may want to go ahead and run the numbers of how much you could save in taxes if your second home in Pennsylvania becomes your main home.

Thanks for the great question and all the best to you in figuring out your situation.

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