Did I lose my $500,000 home sale capital gains deduction, and if so ...

Five year window = July 2005 through July 2010.

Use as main home during that period:

July 2005 through Jan 2007, plus possibly some periods after that.

The simple case is that if it was your main home for 2 out of the last five years, you get the $25K0 exclusion ($500K if MFJ). You appear to fall just short of that, however whether you had additional use as your main home appears to be a rather convoluted story, especially since you "lived abroad" (your words). You can only have one main home at any given time.

Check out IRS Pub 523. Several relevant quotes are included here:

"Factors used to determine main home. In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. Those factors include the following.

1. Your place of employment. 2. The location of your family members' main home. 3. Your mailing address for bills and correspondence. 4. The address listed on your: 1. Federal and state tax returns, 2. Driver's license, 3. Car registration, and 4. Voter registration card. 5. The location of the banks you use. 6. The location of recreational clubs and religious organizations of which you are a member."

"You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 ×

There are plenty of subtleties involving temporary absences, reasons why you were away and/or overseas, etc.

Then, once you figure that out, your adjusted basis is a whole other complicated situation.

Good luck, you might want to engage the services of a professional in the year of sale.

-Mark Bole

Mark

I couldn't find the 2009 Pub 523 for sale of home. But ...

See page 15 of the 2008 Pub 553

I suspect that modifies your answer.

Well, my answer was deliberately vague, so that makes it easy to modify...or not! ;-)

In the straightforward case, you can live in the home continuously for two years, then rent it for three, and still get the full exclusion.

Periods of non-qualifying use do not exist after the last date you used the home as the main home. So yes, it would appear that even if the OP can come up with 2 years of use as a main home, there would be some periods of non-qualifying use, such as the four months rental in 2009 and the two months (proposed) in 2010.

Frankly, I'm skeptical that someone who bought a personal residence in the US for $580K in 2003 could actually sell it for $880K in 2010, but that's not a tax issue per se.

-Mark Bole

I hear you about the sale, price, but believe it or not in Boca Raton FL, things are heating up for the right properties. The very high and very low are still whacked. I'm amazed. If only we really wanted to sell. We're on the fence. Losing a hunk of the capital gain to the IRS might prompt us to hold on longer. House could have sold for close to $1M in 2005-2006, btw.

Ok, to make sure I got this right:

If a sale were to close in July, we would have had to have "lived" in the house cumulatively for 24 months since July 2005. Well, we can only account for 18-20 months. So, if that is the absolute yardstick, we are pretty much screwed on taxes if we sell. Thus, the only way out is to count time we didn't live in the house but it was not being used by someone else and it still counted as our legal primary US residence. (The house is in Florida and we are for tax purposes Floridians, have mailing addresses, driver's licenses and voter registration in Florida; we also have mailing addresses for forwarded mail in California, where my wife's company has US operations, as well as abroad but I can't imagine that would outweigh the other stuff.) t Mark, you seem to say that time after we left the states in lived abroad, the house could still be counted as lived in by us as long as it wasn't rented out, right? What about listed for rent? Empty is not a non-qualifying use, in other words. Is that what you are saying? If so, I feel like I dodged a bullet.

I'm not really saying one way or the other. Proving where your main home is often boils down to the well-known phrase "facts and circumstances". Without a detailed interview, I can't really say what my opinion is as to your main home for each day during the period in question, and even then, it would still be just my opinion -- which is why I recommended engaging a professional to help you with this, and who is willing to sign your return as a paid preparer.

For me, even if I concluded that the situation was in your favor, I would probably want to disclose my position explicitly to the IRS along with the return (Form 8275).

-Mark Bole

It is pretty important, but should you have to move for a job relocation or medical reasons or certain unforeseen circumstances, you could still get an exclusion from gain; but not as much.

Pretty much anything other than living there as your main home is a period of nonqualifying use.

It was a job relocation, so ... we have a shot? How do we compute it?

See IRS Publication 523.

Basically you pro rate your exclusion amount by the time you used it and owned it as your main home in the two years before sale, divided by the two year allowance. But since there seems to be a period of nonqualifying use, you reduce the exclusion amount by that period, as I mentioned in a previous post.

And if there was any rental activity for which you has allowed or allowable depreciation, you exclude that depreciation from exclusion as well.