2. If Married Filing Jointly, you will be limited to taking the Exclusion of Capital Gain on only one house.
If Married Filing Separately, it would be possible for you each to take an Exclusion of Capital Gain on one of the homes, however the exclusion would only apply to the gain for that Taxpayer. If you each were 50% owners, the exclusion would only apply to 50% of the gain for each separate spouse on the house sale they claimed. In addition, Home two would only be eligible for a partial exclusion since it was lived in less than two years.
It would depend on percentage of ownership and the amount of the gain for each house, but most likely filing Jointly and claiming one sale would be more advantageous. (If Home 2 was sold in 2024 and Home 1 in 2025, the exclusion of gain would be taken for tax year 2025)
PLEASE NOTE, THE SALE OF HOME 1 will involve depreciation recapture whether the exclusion to capital gains applies or not. Depreciation recapture is treated as ordinary income and taxed at your regular tax rate. Since it was only rented one year, the recapture will be small, yet still needs to be considered.
"Converted to rental, rented for about a year and sold at beginning of 2025."
1- How to report sale of two homes in same year?
Which tax year, 2025 or 2024?
Were both homes sold in 2024 or 2025, or different years?
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