Home Sale Tax

In March 2019 we purchased a home in DE and declared residency. We did not sell our house in MD. now, 3 1/2 years later, we are close to being ready to sell the MD house, but we are outside the 3 year window for the primary home tax break. We plan to move back into the house, sell when we are back in that window, and purchase a different home in MD. Does it make sense to declare residency in MD starting October of this year, or should we wait until jan 1, 2022. We’ve had this home for many years, the profit will be close to $500k.

LarryB262: “In March 2019 we purchased a home in DE and declared residency. We did not sell our house in MD. now, 3 1/2 years later, we are close to being ready to sell the MD house, but we are outside the 3 year window for the primary home tax break. We plan to move back into the house, sell when we are back in that window, and purchase a different home in MD. Does it make sense to declare residency in MD starting October of this year, or should we wait until jan 1, 2022. We’ve had this home for many years, the profit will be close to $500k.”

If I am the IRS, if you still have residency in Delaware, then it is difficult for me to believe that the Md. house is your principal residence.

I am not a tax guy but

“Other types of proof may be required to establish where one’s principal residence is. This can include utility bills with the occupant’s name and address, a driver’s license with the address, or a voter registration card.”

and

“A principal residence may be verified through utility bills, driver’s license, or voter registration cards. It may also be assessed by tax returns, motor vehicle registration, or the address closest to your job.”

https://www.investopedia.com/terms/p/principalresidence.asp

I think you declare residency from the time you want to start counting living in such Md house as part of owing and residing for 2 of the last 5 years tax exclusion - driver’s license, car registration, voter registration, state income tax filing, etc.

You hate to pay capital gains on 500k because you were still listed as a Delware resident for a few months that you were counting on for the home tax exclusion.

BWDIK?

Regards, JAFO

We own both homes, about 2 hours apart. The utilities, taxes and all house bills for both homes are in our names and paid by us. Our college daughter has been living in the MD house full time, we often visit and perform all maintenance. We retired to DE and planned to sell MD when daughter graduated, but we find we prefer MD to DE. We will keep DE as a vacation home. It is our intention to move permanently back into the MD house, change our licenses, cars, etc. I’m wondering if there is a disadvantage to moving in October and paying 2 state taxes? or just start fresh Jan 1.

It is our intention to move permanently back into the MD house, change our licenses, cars, etc. I’m wondering if there is a disadvantage to moving in October and paying 2 state taxes? or just start fresh Jan 1.

You need to understand how both DE and MD determine that you are full year resident vs. part year resident vs. non-resident, what the requirements to file tax returns for each of those status and see if there is any advantage in moving earlier/later.

I know that there are some states that give you a benefit on property taxes if the house is your principal residence as of Jan 1. I have no idea if MD or DE does that, but if one or both of them do, that may help you decide which house you want to be living in on that date.

You also need to figure out what time of year you plan to put the MD house on the market to be sure that you will meet the residency requirements to qualify for the exemption on by the time you want to put in on the market, without having to wait another full year. Your realtor should be able to help you figure out what the best time to put a house on the market in your area is.

AJ

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One does not “declare” residency. Residency is determined by looking at the facts and circumstances and then applying the relevant law.

Residency in a state for tax purposes is determined by looking at state law. And the laws of each state are not necessarily synchronized. So it is possible to be a resident of two states at the same time.

You are also looking at residency in a specific house for determining the qualification for the home sale exclusion. That is yet another set of laws to understand.

Focusing on just that issue (the federal exclusion) you would need to meet the tests to claim the exclusion.

  1. You need to own the home for two out of the last five years before the date of sale. Sounds like this test is met.

  2. You need to occupy the house as your primary residence for two out of the last five years before the date of sale. It seems like this test is the problematic one.

  3. You can’t have used the exclusion on a different residence in the two years before the sale. You don’t mention any other homes, so this doesn’t seem like a problem. But it could be if there is some other house. It could also come up if you plan to sell both the DE and MD houses.

The upshot here is that you don’t just declare a residence. Instead, you need to arrange your affairs so that you meet the tests. Specifically, you need to take the necessary actions so that the MD house becomes your primary residence and remains so for two years.

Those actions might include things like being physically present in MD, registering to vote, seeing doctors and other professionals there, things like that. Of course, this can be complicated by the fact that MD and DE are neighboring states, and that neither are terribly large. That complexity is why you need to be careful and document your actions.

—Peter

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For US Federal taxes, there is a 5-year window. And the IRS requirement is “used it as your residence”.

One does not “declare” residency.

True enough. Residency is where you live. State tax residency can be declared using State tax forms (resident, part-year, or non-resident), and records are needed for proof. Dual state residency is possible (domicile in one state, and live more than 183 days in a second state).

Does it make sense to declare residency in MD starting October of this year, or should we wait until jan 1, 2022.

Total State income taxes would probably be about the same. Generally, there is no double taxation (taxing the same income twice), and the DE and MD tax rates look similar. Both DE and MD count tax residency as more than 183 days. Changing your life (where you live) based on the need to file one tax return (part-year MD 2021) sounds like the tax tail wagging the dog. The 500k Federal credit is worth considering though.

Some seasons see higher house prices. You might want to sell around June and buy a few months later. Calculate when you will reach the 24 month limit, and see if that is around June. Moving to MD in October might affect the sell date.

— links —
What are the IRS primary residence rules?
“If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement… A vacation or other short absence counts as time you lived at home”
https://www.irs.gov/publications/p523#:~:text=If%20you%20own….

If I sold a 2nd home in another state, do I need to file income taxes for that state, June 3, 2019
“Yes, if you sold property in another state, you should report the transaction to that state. A state can typically tax a non-resident on income that is sourced to that state.”
https://ttlc.intuit.com/community/tax-credits-deductions/dis…

2022 Capital Gains Tax Rates by State
Delaware taxes capital gains as income and the rate reaches 6.60%.
Maryland taxes capital gains as income and the rate reaches 5.75%.
https://smartasset.com/taxes/state-capital-gains-tax

Tax Residency Rules by State, Updated July 10, 2022
https://www.investopedia.com/tax-residency-rules-by-state-51…

What is the Best Time to Sell a House?
https://www.lendingtree.com/home/mortgage/best-time-for-sell…

Similarly, my MD home sale experience: I sold a home in MD (resort area near DE) in Aug 2019 that after retiring I resided in 2011-2016 (full years, 10 days 2017), while also keeping my home in WA.

My WA home had passed the 2 year residency requirement so I moved back Jan 2017 to re-establish my WA residency & sell it. Changed mail address, drivers license, vote reg immediately. Then RMD’s loomed large in the background, WA state has no state income tax & the MD home still met IRS 2 of 5 year residency requirements when I sold and was recognized as such by the IRS & cap gain was under $250K single allowance so no Fed tax… So it was an easy decision moving back permanently where I’d spent 30+ yrs, after both parents had passed in MD.

Not so for the State of MD. They initially withheld state tax on sale since I was a non-resident. When I filed a 2019 NR state tax form to reclaim the withholding, they claimed I didn’t meet MD residency reqm’ts. So I appeal after tax atty confirms my timeline is good, and wait during COVID lock down exchanging files & info…

Long story short, the issue went back to 2007 when the house was gifted to me and I checked a box on a homestead form that said it was NOT my primary residence, TRUE at the time. When I moved there in 2010 & established MD residence in 2011, I filed resident income taxes for every year thru 2016. They apparently ignored that fact. In the end my 2 of 5 timeline was fine and they refunded the full withholding. But it was a slog complicated by COVID when the check arrived in Aug 2021 and I’m not convinced it wasn’t a money grab try when all my "t’s & i’s weren’t crossed.

Just keep accurate records of the dates you’re using to establish residency reqm’ts. And watch those obscure forms! USPS online sends confirmation of change of address date. Don’t forget to update new addresses for billers, banks, etc.

Don’t dally on any appeal of a denial, it can be short, I think 30 days was quoted on initial denial. Then there was a deadline for support docs too as they were identified.

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