Q:

Subject: defining a primary residence

Greetings, Thanks for your very useful information on residences. I have a situation for which I haven’t been able to get credible information and am hoping you might have an idea. I'm a US tax payer living in a house in Belgium which I have owed for the past 3 years. My company is now sending me on a work-related assignment outside of Belgium The length of that assignment is not yet certain, but it may be for 3 -5 years. I want to keep the house here as it is my only property and I consider it my primary residence to which I would return eventually. Would the IRS see it that way, or do I lose the right to claim this house as my primary (read permanent) residence because I’m away on assignment. I understand that claiming a house as one’s primary residence is the sole criterion according to which the IRS either does or does not levy capital gains taxes when property is sold.

Thanks for your help in clarifying this question.

 A:

I'm sensing a couple of different issues here.

First, if you are wondering whether your time away on assignment can count as part of the time you owned and occupied the home as your primary residence in order to qualify for the two years out of five years rule, the answer is no.  Temporary absences away are fine; but yours is more of a permanent or long-term relocation. 

Before the residence sales rules were overhauled in 1997, there was an allowance for older people who were forced to move into a special care facility.  They were allowed to count that time as if they were living in their own homes in order to qualify for the occupancy rule that was in effect at that time for the once in a lifetime senior citizen tax free exclusion.  There is no such provision in the current law.

If your plan is to hold onto the Belgium house so that you can live there after finishing this current assignment, you would only have to live there for two more years in order to be eligible for the tax free sale of up to $250,000 of profit.  Of course, if you rent it out in the meantime, you will have to pay tax on the depreciation. 

You also have the option of waiting up to three years after moving out to sell the home and utilize the tax free sale; with the same provision for depreciation recapture.

The other issue you should be concerned with is how to treat the expenses on the home while you are away on assignment, mainly interest and property taxes.  That will depend on how the home is actually being used.  If it's rented out, everything will go on Schedule E.  If you leave it empty or have family or friends stay there, it would be considered a personal (but not primary) residence, with interest and taxes deducted on Schedule A.

 As always, my comments are general in nature.  You really need to work with a tax pro who can better analyze everything in relation to your unique circumstances.

Good luck.

Kerry Kerstetter

Follow-Up:

 Dear Kerry,

 Thank you very much for taking the time to clarify these things. We will consult with someone here now to explore the specifics of our situation - but at least I have a starting frame of reference.

 

Thanks again.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/14/2005 12:13:00 PM Send this post: