Buying your retirement home before retiring (55, vacations, long distance, state)
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sure you can convert it later . but if you read my post when converting it later the exclusion is prorated by the total number of years owned . it will always end up having the exclusion cut once you buy in advance .
be careful doing this . we tried this and had two negatives .
we realized a few years in that most of the things that were suddenly coming up on the radar that would be important to as as we age were lacking . things like public transportation systems if we couldn't drive , choices in medical care was lacking ,specialists , there was little to do all winter , if i wanted to work there were only low pay touristy jobs . so we sold 5 years later .
the bigger issue is this: the tax code was revised around 2009 or so . if you buy a non primary residence and use it as a 2nd home or rental then the 250k exclusion if you are single or the 500k if married gets prorated if you decide to sell aftyer making it a primary home ..
own the place 6 years and if it is your primary for 3 years then you only get 1/2 the exclusion on any gains .
Welcome back! I was going CRAZY without you on here. LOL.
I wasn't even posting much at all because what was the point??
From what I see, if you pass the "Maximum Exclusion Test", you do not have to apply the reduced exclusion formula that you outlined, regardless of whether the home was originally a rental or 2nd home.
Quote:
Does You Home Qualify For Maximum Exclusion
Your sale qualifies for exclusion of $250,000 gain ($500,000 if married filing jointly) if the following is true:
You owned the home and used it as your main home during at least 2 of the last 5 years before the date of sale.
You did not acquire the home through a like-kind exchange (also known as a 1031 exchange), during the past 5 years.
You did not claim any exclusion for the sale of a home that occurred during a 2-year period ending on the date of the sale of the home, the gain from which you now want to exclude.
the maximum exclusion test does not apply to converted primary's . you missed reading the instructions for prorating starting on page 15-16 of your link .
a special rule enacted in 2009 limits the $250,000/$500,000 exclusion for homeowners who initially use their home for purposes other than their principal residence, such as a rental or vacation home. The rule requires you to reduce pro rata the amount of profit you exclude from your income based on the number of years after 2008 you used the home as a rental, vacation home, or other “nonqualifying use.”
they always stay prorated if bought from 2009 on .. the maximum exclusion is only for straight out primary homes day 1 . they allow partial exclusions under certain circumstances so they have the criteria test for seeing if you get a max or partial but that has nothing to do with conversions from 2nd homes or rentals . .
on your irs worksheet page 15-16 from your link is where they tell you how to prorate if the house was a not a primary as of 2009 . i guess you missed that part .
For me, the issue would be keeping the second home in tip-top shape while I lived most of the time elsewhere. Finding people to check on the home, keep the lawn and shrubs in good shape, etc., might be tough. You won't get yardwork done for less than 35-40 per week even where the economy is depressed. Upkeep on the second home might take more hours and dollars than the primary one, simply because you are not present to take care of little things before they become big ones. I would wait at least until you are within a year of retiring to even consider this kind of transition. At least you will have less time to change your mind as to where you want to live and the neighborhood will not be changing a lot. Five years is such a long time.
There is another big issue. You might just as well take an ad in the local paper and let everyone interested know that the house is unoccupied. Certainly everyone in the neighborhood will know immediately as well as the postman, garbage service, delivery services, landscapers, property manager and staff and anyone driving by.
the maximum exclusion test does not apply to converted primary's . you missed reading the instructions for prorating starting on page 15-16 of your link .
You only have to use the pro-rating worksheet on pages 15-16 if you do not meet all five of the Eligibility Requirements on page 3. None of the Eligibility Reqs say anything about the house's use (rental, 2nd home, etc.) prior to the 5 year test period. If you don't meet the Eligibility Reqs, then you go to the pro-rating formula, otherwise you use the maximum exclusion. At least that is what the IRS doc says.
In any event, we will do whatever Turbo Tax says to do when we file taxes next year.
that is why we only bought in a gated hoa with security . no issues at all in the development
That was my initial plan when I wanted to do a lot of travel. You need a gated community and also great neighbors or someone you pay to handle emergencies. My relatives were in Europe when a tree fell on their house. Fortunately they returned a few days later. I have another relative who owns a rental house in Hawaii. He had fits taking care of hurricane damage when he was living in the States.
it was very costly . not being there we had to pay for everything from cutting the grass to snow removal .
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