Dear Monty: Our father is 94. He must sell his condo, which he bought in 2008. He moved out in 2022 because we had a risk assessment, and the floor plan presented a dangerous fall risk with two flights of stairs. Maintenance costs, real estate taxes and HOA fees are expensive, so for the last two years, we rented it — and lost money both years. He qualifies for the federal exemption of $250K (primary residence two of the previous give years). Still, the California tax form 593 sounds slightly different than the federal ruling that if you had to move because of your health, you are not subject to capital gains over the $250K exemption. Can you provide us with any clarity on this subject?

Monty's Answer: This situation involves several important tax considerations regarding the sale of a primary residence and medical necessity exemptions. Here are the key points:

Federal Tax Treatment: The Federal Section 121 exclusion allows up to $250,000 ($500,000 for married couples) to be excluded from capital gains when selling a primary residence. The basic requirement is that the owner lived in the home as their primary residence for at least two out of the five years before the sale.

However, an essential provision in the tax code is relevant here — the reduced occupancy requirement due to health conditions. The IRS allows for a reduced occupancy if health reasons necessitate the move. Given that your father moved out due to physical limitations (the inability to navigate stairs), this situation likely qualifies for this exception.

California Form 593 Considerations: Form 593 is California's Real Estate Withholding Tax Statement. While this form is required for California real estate transactions, it primarily deals with withholding requirements rather than final tax liability. The withholding requirements under Form 593 don't directly affect the ultimate tax treatment of the sale.

For California state tax purposes, the state generally follows federal rules regarding the primary residence exclusion. However, there are some nuances in how California applies these rules. The health-related exception that applies at the federal level should also apply for California tax purposes, but the application might differ slightly.

Recommendations:

No. 1: Document the medical necessity of the move thoroughly. Obtain written documentation from healthcare providers about the father's condition and why the condo was unsuitable. Include detailed records proving when he moved.

No. 2: Maintain records showing the property was rented at a loss, demonstrating no profit motive for the rental period.

No. 3: Consider consulting with a tax professional specializing in California real estate transactions, particularly one familiar with elder care situations. They can provide specific guidance on how the California Franchise Tax Board would treat this situation.

No. 4: Remember that while Form 593 deals with withholding requirements at the time of sale, the final tax treatment will be determined when filing tax returns.

The rental period shouldn't affect the primary residence exclusion since it falls within the five-year lookback period, and your father's occupancy meets the two-out-of-five-years requirement. The health-related exception provides additional protection for the exclusion. While the situation should qualify for favorable tax treatment under federal and California rules, I recommend retaining a qualified tax professional prior to a sale.

Richard Montgomery is a syndicated columnist, published author, retired real estate executive, serial entrepreneur and the founder of DearMonty.com and PropBox, Inc. He provides consumers with options to real estate issues. Follow him on Twitter (X) @dearmonty or DearMonty.com.

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