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Could someone explain the "tack-on" part of the ownership and use test? For example, in June of 1977, I sold a home I had lived in for five years and in August of 1977, bought another home. I was under the impression that I had to live in my present home until August of 1999 before selling, in order to avoid paying capital gains. I now am being told that if I wanted to sell my house in June (which would probably be more advantageous), I could tack on the less-than-two-year period to my previous five year period, so that if I made a gain on the sale, I still wouldn't have to pay taxes on it. I don't understand -- if this is so, is it a one-time thing? Can one continue to use "tack-on" periods indefinitely? I can't believe the IRS would be so generous. Please help this confused fool!
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[[Could someone explain the "tack-on" part of the ownership and use test?]]

I'll try. But I have a series of posts on the sale of a principal residence that will answer all of your questions. It's in the Taxes FAQ area. You might want to check it out.

[[ For
example, in June of 1977, I sold a home I had lived in for five years and in
August of 1977, bought another home. I was under the impression that I had to
live in my present home until August of 1999 before selling, in order to avoid
paying capital gains.]]

Nope...incorrect. If you sold your old 1997 home and "rolled" the gain over into your new home, your holding period for the new home goes all the way back to your original purchase of the first home.

[[ I now am being told that if I wanted to sell my house in June
(which would probably be more advantageous), I could tack on the
less-than-two-year period to my previous five year period, so that if I made a
gain on the sale, I still wouldn't have to pay taxes on it.]]

That is correct...IF your old home was "rolled over" into your new home.

[[ I don't understand -- if
this is so, is it a one-time thing? Can one continue to use "tack-on" periods
indefinitely?]]

Nope. Now when you sell your existing property, your new holding period will start all over again with your next purchase. The only reason that you are able to "tack on" the holding period in the first transaction is that the gain on the first home was deferred into the second purchase...which also allows the tack on.

But when you sell your existing property, the gain will be excluded, and your tack on period will end.

[[ I can't believe the IRS would be so generous. Please help this
confused fool!]]

Read my posts in the Taxes FAQ area for more specific details.

TMF Taxes
Roy

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