Avoiding capital gain on two sales

[funes]

Kindly help with this scenario, I am getting a bit nervous about this:

- I purchased a home on May 24, 2021 and it became my primary residency immediately (as in, we moved in that day)

- I sold my prior property Jul 30, 2021 (it remained unoccupied after move-out). I gained ~150K capital gain after living in 5 years. Did not get taxed on it.

- I am now purchasing a home on another state with closing date Mar 6, 2023 but it will remain unoccupied until at least May 25, 2023 which is when I am hoping to close on the current property. I will have capital gains on this sale but < 500K.

Is this a scenario that automatically prevents me from getting taxed on capital gains? I will have lived at this current property for 2 years and 1 day on closing. But is the reporting of primary residency an honor system? That's what makes me nervous and can't seem to find an answer. I wouldn't have anything to show primary residency on May 24, 2021 other than some texts to the family because there is certainly a delay of weeks in filing for the primary property tax exemption (homestead).  And does the sale of my prior property interfere at all with this 2-year-1-day calculation? Thanks for your help!

[Mike9241]

the full home sale exclusion can only be used once every two years. a partial exclusion would be availible

you sold one home on 7/30/2021 and apparently used the home sale exclusion to avoid tax on the $150K gain

if you sell the current property before 8/1/2023 the reduced home sale exclusion will apply since the two sales within two years rule would apply.

so roughly speaking there is about 660 days between your last home sale exclusion (7/30/2021)  and the current one planned for 5/23/2023. 2 years is 730 days so 660/730 is about 90% of the maximum $500K exclusion.  

[Carl]

But is the reporting of primary residency an honor system?

No. It's the law. The property must have been your primary residence for at least 730 days of the last 1826 days you owned it, counting back from the closing date of the sale. The closing date of the sale does not count as a day of residence for the seller. It can count as a day of residence for the buyer, if the buyer begins moving in on the closing date.

Just understand that you can't have overlap. In other words, if it takes you 2 days to move out of your old residence and into the new, say a Monday and a Tuesday, those days can not be counted as a day of residence for both properties. It's one or the other.

On the property you're purchasing, based on the information you provided you're closing on that property on May 6, 2023 but will not be moving into it until May 25.  Therefore, your current residence remains as such, until May 24. May 24 will be your last day in the current residence, and May 25 will be your first day in the new residence.

[funes]

Thank you @Mike9241 - So the 730 days would not be based on the purchase of this current home but rather the sale of the other home. And if so, what does the 90% mean? Does that mean that I would have no capital gain tax up to 450K?

@Carl I am not so worried about the next property not starting until May 26th because we will stay in that one long term. I am worried about the fact that I am selling this house May 25th 2023 because I moved in May 24th 2021 (hence 2 years) but there was a sale of another property that was previously my primary home for 5 years that occurred July 30th, 2021. And I can't find a definition of primary home ownership. 

[ShirlynW]

I depends. The definition for the ownership of a primary home can be found in IRS Pub. 523.