2nd Opinion on Primary Residence Capital Gain Exclusion Residence Test Wanted

[The208Accountant]

I've never had this situation and wanted a 2nd opinion - 

A client has been in a nursing home for 10 years due to his inability to care for himself. He has owned his property since the 70's. The property sold in 2020. Although the nursing home has been his residence for the last 10 years, the following paragraph copied from the IRS website sounds like we can still claim the exclusion. Thoughts?

If you become physically or mentally unable to care for yourself, 

and you use the residence as your principal residence for 12 months in the 5 years preceding the sale or exchange, any time you spent living in a care facility (such as a nursing home) counts toward your 2-year residence requirement, so long as the facility has a license from a state or other political entity to care for people with your condition.

https://www.irs.gov/publications/p523#en_US_2020_publink10008956

[TaxGuyBill]

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@The208Accountant wrote:

A client has been in a nursing home for 10 years due to his inability to care for himself.

and you use the residence as your principal residence for 12 months in the 5 years preceding the sale or exchange,

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If the taxpayer did not use the home has their principal residence for 12 months in the last 5 years, no, the exclusion does not apply.

[BobKamman]

Any time you read something in an IRS Pub ask yourself, “Where did that come from?” Because you are always reading a secondary source and it is always better to find the primary source.

Sometimes that will be in a Revenue Ruling or Regulations. Maybe, even in a Court decision. A good place to start looking, though, is the Internal Revenue Code itself.

The answer to your question is right there in Code Section 121:

(d)(7) Determination of use during periods of out-of-residence care
In the case of a taxpayer who—
(A)becomes physically or mentally incapable of self-care, and
(B)owns property and uses such property as the taxpayer’s principal residence during the 5-year period described in subsection (a) for periods aggregating at least 1 year,
then the taxpayer shall be treated as using such property as the taxpayer’s principal residence during any time during such 5-year period in which the taxpayer owns the property and resides in any facility (including a nursing home) licensed by a State or political subdivision to care for an individual in the taxpayer’s condition.

Which is exactly what the Pub says. Your client was not in the home for at least 12 months of the last five years. Therefore, no exclusion.

[The208Accountant]

Aaah... I was definitely reading into that backwards. Thanks for your input!