I am married and currently live in Texas where my wife and I just
bought a condo.  However, I might be accepting a job offer in
California soon.  If I do, I plan to work in California and rent a
studio apartment while my wife lives in our home in Texas.  Until she
moves to California, I plan to fly back every other weekend, and she
will fly out to California on alternate weekends to visit.

I don?t know how long this transition period from Texas to California
will take.  Real estate is obviously expensive in California and it
might take several months, maybe even a year or more, to find the
right home to buy in California, at which time we would sell our home
in Texas.

Even though I will be working in California, renting a studio
apartment, will hold a California driver?s license, register my
vehicle in California (I don?t want to drive illegally because I think
there is a limited period of time where you can drive with
out-of-state licenses and tags), I still consider the home in Texas to
be my main home since I?ll continue to pay the mortgage and taxes, and
will be coming back every other weekend.

In addition to the work I?ll be doing in California, I am an officer
of a Texas-based company with my wife, and she will continue to run
the business from Texas while I manage parts of the business from
California (do the books, run the Web site).  The inventory for our
business is also stored near our home in Texas.

I have read Publication 523 ("Selling Your Home").  When I ultimately
sell my Texas home, I plan to use the "Reduced Maximum Exclusion"
(page 14) to pro-rate the tax free gain of my Texas home (up to
$500,000 for married filing jointly) because of the exception granted
for a change in employment.

I plan to use Worksheet 3 (page 15 of Publication 523) to calculate
how much I can exclude from taxable gain of my Texas home when I sell
it.  I will use the number of days (as opposed to months) since the
number of days I will physically be in my Texas home each month will
be 5-7 days per month, plus my allotted vacation time will be spent
there, and I don?t want to get in trouble with the IRS by interpreting
that amount of time as a full month.  My wife will apply 30 days as
the time she made our Texas home her "main home" since she will be
there almost all the time.  I?m just trying to pick up a fraction of
the exemption on my side for the 5-7 days I?m there a month.  I will
keep receipts of my travel expenses and purchases made in Texas during
those weekends to show I was physically in Texas during those days.

I think it?s important to note that this worksheet does not ask about
"number of days as a legal resident," but instead asks, "number of
days you used the property as a main home..."

So the definition of "main home" is the crux of the question under
this scenario.  I consider my home in Texas to be my main home during
my transition period since my wife lives there, I will be spending
some of my time there (20% of my time), almost all my possessions will
be there, and we are running a company based in Texas.

I have read all of the IRS information I can, and I don't see anything
in there related to this kind of situation.  I just want to make sure
I?m not going to get in trouble with the IRS using this interpretation
of "main home" because of the what I have described above:

- I will be working in California most of the time (except for 5-7
days a month, where I will work remotely from Texas two of those
days), paying taxes there, and have a driver's license and car
registered there.

- I don?t know how long the transition period will take.  It could
take a year or more, at which time we?ll sell our home and calculate
the exemption based on the date we sold our home in Texas.

Dear ballclub-ga

Thank you for allowing me to answer your interesting question. The
term ?main home? is described in the introductory material to IRS
Publication 523. Simply put the publication says, ?Generally, your
main home is the one in which you live most of the time.?

IRS PUBLICATION 523
http://www.irs.gov/publications/p523/ar01.html

The publication goes on to more definitively describe ?main home?
under the section aptly entitled, ?MAIN HOME?:

?This section explains the term ?main home.? Usually, the home you
live in most of the time is your main home and can be a:

House,

Houseboat,

Mobile home,

Cooperative apartment, or

Condominium.

To exclude gain under the rules in this publication, you generally
must have owned and lived in the property as your main home for at
least 2 years during the 5-year period ending on the date of sale.

Land.   If you sell the land on which your main home is located, but
not the house itself, you cannot exclude any gain you have from the
sale of the land.

Example.

On March 4, 2005, you sell the land on which your main home is
located. You buy another piece of land and move your house to it. This
sale is not considered a sale of your main home, and you cannot
exclude any gain on the sale of the land.

Vacant land.   The sale of vacant land is not a sale of your main home unless: 
The vacant land is adjacent to land containing your home,

You owned and used the vacant land as part of your main home, 

The sale of your home satisfies the requirements for exclusion and
occurs within 2 years before or 2 years after the date of the sale of
the vacant land, and

The other requirements for excluding gain from the sale of the vacant
land have been satisfied.

If these requirements are met, the sale of the home and the sale of
the vacant land are treated as one sale and only one maximum exclusion
can be applied to any gain. See Excluding the Gain, later.

More than one home.   If you have more than one home, you can exclude
gain only from the sale of your main home. You must include in income
gain from the sale of any other home. If you have two homes and live
in both of them, your main home is ordinarily the one you live in most
of the time.

Example 1.

You own and live in a house in the city. You also own a beach house,
which you use during the summer months. The house in the city is your
main home.

Example 2.

You own a house, but you live in another house that you rent. The
rented house is your main home.

Factors used to determine main home. In addition to the amount of time
you live in each home, other factors are relevant in determining which
home is your main home. Those factors include the following.

Your place of employment.

The location of your family members' main home.

Your mailing address for bills and correspondence.

The address listed on your: 

Federal and state tax returns,

Driver's license,

Car registration, and

Voter registration card.

The location of the banks you use.

The location of recreational clubs and religious organizations you are a member of.

Property used partly as your main home.   If you use only part of the
property as your main home, the rules discussed in this publication
apply only to the gain or loss on the sale of that part of the
property. For details, see Business Use or Rental of Home, later.?

http://www.irs.gov/publications/p523/ar02.html#d0e343
 
It appears then that by the IRS?s definition your main home will be
your California residence, regardless of your Texas state residency,
since that?s where you will PHYSICALLY and PRIMARILY reside. If you
require an absolute confirmation of this fact, you may contact the IRS
support Center and provide them with details that almost certainly
would not have if they were to ask for them, or I would have called
them on your behalf.

Live Telephone Assistance
Call 1-800-829-1040

Live Telephone Assistance for Businesses
Call Toll-free, 1-800-829-4933

Live Telephone Assistance for people with hearing impairments
1-800-829-4059 (TDD). (Hours of Operation 7:00 a.m. to 10:00 p.m. Monday - Friday).

I hope you find that my answer exceeds your expectations. If you have
any questions about my research please post a clarification request
prior to rating the answer. Otherwise I welcome your rating and your
final comments and I look forward to working with you again in the
near future. Thank you for bringing your question to us.

Best regards;

Tutuzdad-ga ? Google Answers Researcher


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IRS

MAIN HOME

PRIMARY RESIDENCE

PUBLICATION 523

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Request for Answer Clarification by ballclub-ga on 14 Oct 2006 14:18 PDT

Thank you for pointing out the "main home" section.  I had missed
that.  It seems pretty definitive there what a main home is, but after
I posted my question, I did additional research and found what I
believe is a discrepancy through the definition of "vacation home" in
the IRS FAQ:  http://www.irs.gov/faqs/faq-kw203.html

"You are considered to use a dwelling AS A HOME if you use it for
personal purposes during the tax year for more than the greater of 14
days or 10% of the total days it is rented to others at a fair rental
price. IT IS POSSIBLE THAT YOU WILL USE MORE THAN ONE DWELLING UNIT AS
A HOME DURING THE YEAR.  For example, if you live in your main home
for 11 months and in your vacation home for 30 days, your home is a
dwelling unit and your vacation home is also a dwelling unit, unless
you rent your vacation home to others at a fair rental value for more
than 300 days during the year."

With this statement, I believe I can classify my "vacation home" in
Texas as a "main home" for the time I'm going to be there, which is
more than 14 days per year.  As a result, I believe using the number
of days I'm using my vacation home as my main home (approx. 60-70 days
per year) on Worksheet 3 would be an appropriate way to treat this
scenario.  What is interesting is that MY "vacation home" is my wife's
"main home."  There is no law against that.

With this treatment, the down side is that I can only do this once
every two years as described in Pub 523:

"More than one home sold during 2-year period:  You cannot exclude
gain on the sale of your home if, during the 2-year period ending on
the date of the sale, you sold ANOTHER home at a gain and excluded all
or part of that gain.  If you cannot exclude the gain, you must
include it in your income."

Although at first read of this paragraph it would seem the IRS is
addressing the traditional arrangement where people typically live in
one home throughout an entire year, I think it can also be interpreted
that vacation homes where you reside for part of the year (as long as
it's over 14 days) that you end up selling can be considered as
ANOTHER home.

In Example 1 that you cited, I don?t think that applies to me because
I will not own the home where I will be living most of the year; I'll
be renting.

Example 2 doesn't apply to me because this example applies to someone
who owns a home, but doesn?t live in it at all during the year.  I
will continue to own the home in Texas.

In sum, the IRS in this "More than one home sold..." clause doesn't
seem to exclude vacation homes that are your main home for part of the
year.

As I remember from a tax class I once took, much of tax law is open to
interpretation.  And if the IRS disagreed with me, I believe if I took
it to court that my interpretation would withstand scrutiny.  Would
you agree?  (please respond).

Even without this vacation-home-being-a-main-home-for-part-of-the-year
interpretation, several of the aforementioned factors would apply to
me: my family members? (spouse) main home is my Texas home, bills for
my Texas home go to the Texas location, I?ll continue to have a car
registered in my name in Texas, I will continue to use my bank in
Texas to make deposits, ATM transactions, I will continue to be a
member of a recreational club in Texas, etc.  There's that
interpretation principle again.  ;-)  But I think the one I mentioned
about the vacation home is the one I would use if a dispute with the
IRS arose.

---

Clarification of Answer by tutuzdad-ga on 14 Oct 2006 14:36 PDT

Indeed I do agree that the law is open to interpretation and the IRS
makes no attempt to conceal the fact that they are willing to make
exceptions in some cases depending on the many and varied details of
each individual's tax status. Whether or not the matter would pass the
legal llitmus test is not for me to say since our advice here is not
intended to replace profesional tax advise.

As for the "main houses" in your life (your's and your wife's) I am
certain you have, at the very least, an relatively unique case but
probably not one that has no previous precedent. Frankly, I'd simply
call the support center and explain my situation and ask them directly
what you are expected to do. They will be more than happy to assist
you. Contrary to what most people tend to believe, the IRS is not out
to get blood from every turnip out there. They would much prefer that
someone call and ask the necessary questions so future (and costly to
both parties) misunderstandings can be avoided.

You must keep in mind that (as I understand the publication) what your
"main home" actually is, is not necessarily what is considered your
"main home" for exclusion, deduction or gains purposes. The IRS
clearly defines your "main home" as home in which you physically live
MOST of the time. However, for the special purposes I mentioned, your
"main home" must meet two tests: "the ownership test" and "the use
test". To meet these minimums you must have owned the home for at
least 2 years (the ownership test), **AND** you must have lived in the
home as your "main home" for at least 2 years (the use test). Since
you have done neither with the home in California, but it IS where you
primarily live, register your car, registered your licenses, etc, the
TECHNICAL deferrment is to the home in California - but NOT for the
special purposes I mentioned. You see? With that said, it is my
understanding that the home in California is fundamentally YOUR main
home as defined by Pub 523. How the IRS might answer your question
regaridng your WIFE may be the loophole that you are seeking.

I suggest you call them. They can probably answer your question in a
matter of minutes. As I said, they'd certainly ask me questions I
cannot answer or I would have done it for you. The number is toll free
and you have nothing to lose.

Good luck;
tutuzdad-ga

See text copied below, from the IRS Regulations under I.R.C. Section
121, see especially point (2). Dependings on the facts, it may be
reasonable to assert that the Texas condo remains your "principal
residence" (the Code and regs use the term "principal residence" and
not "main home") even though you may spend a majority of your time in
CA.   Note that it is also CRUCIAL that the TX condo be considered
your principal residence at the time you sell it in order to satisfy
the terms of the "change in employment" safe harbor test of Reg Sec
1.121-3(c)(2).

(b) Residence?(1) In general.
Whether property is used by the
taxpayer as the taxpayer?s residence
depends upon all the facts and
circumstances. A property used by the
taxpayer as the taxpayer?s residence
may include a houseboat, a house
trailer, or the house or apartment that
the taxpayer is entitled to occupy as a
tenant-stockholder in a cooperative
housing corporation (as those terms are
defined in section 216(b)(1) and (2)).
Property used by the taxpayer as the
taxpayer?s residence does not include
personal property that is not a fixture
under local law.

(2) Principal residence. In the case of
a taxpayer using more than one property
as a residence, whether property is used
by the taxpayer as the taxpayer?s
principal residence depends upon all
the facts and circumstances. If a
taxpayer alternates between 2
properties, using each as a residence for
successive periods of time, the property
that the taxpayer uses a majority of the
time during the year ordinarily will be
considered the taxpayer?s principal
residence. In addition to the taxpayer?s
use of the property, relevant factors in
determining a taxpayer?s principal
residence, include, but are not limited
to?
(i) The taxpayer?s place of
employment;
(ii) The principal place of abode of the
taxpayer?s family members;
(iii) The address listed on the
taxpayer?s federal and state tax returns,
driver?s license, automobile registration,
and voter registration card;
(iv) The taxpayer?s mailing address for
bills and correspondence;
(v) The location of the taxpayer?s
banks; and
(vi) The location of religious
organizations and recreational clubs
with which the taxpayer is affiliated.

---------------------------------------------
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rules governing tax practice, we inform you that any advice contained
herein (including in any attachment) (1) was not written and is not
intended to be used, and cannot be used, for the purpose of avoiding
any federal tax penalty that may be imposed on the taxpayer, and (2)
may not be used in connection with promoting, marketing or
recommending to another person any transaction or matter addressed
herein.