Can I defer a home sale exclusion to a sale of another home

[Viv]

I am selling two houses (both primary addresses with just a month overlap in the sale of one and purchase of another). One house  (house A) I lived in for more than 2 years and sold i January 2022 and the other house (house b) I lived in less than 2 years but more than 1 year and am moving due to a divorce and am selling in April 2022. My question is: 

(1) Can I elect to defer my home sale exclusion of house A and use it to reduce my partial exclusion for house b (I say partial because i don't meet the requirements of 2 in 5 years rule of residence nor ownership) 

[ThomasM125]

Yes, you can choose to pay tax on the gain on sale of house A so you can use the exclusion to exempt taxation on the gain from the other house sale.

[Mike9241]

be careful, you want to minimize the gain that is taxable.    you would qualify for the full exclusion on house 1 because you lived and owned it for 2 years.

you would only be entitled to a partial exclusion on the second (even if you waive the exclusion on the first) divorce would be an unforeseen circumstance

one year would mean approx 50% of the full $250K exclusion.

[Viv]

Thanks @Mike9241 . May we walk through the below example I have? Questions are in blue:

HOUSE A: 

   Cost Basis: $100k 

+ Closing Costs: $5k 

+ Improvements:$5k

=Total Adjusted Cost Basis: $110k

Sale Price: $150k

-Closing Costs: $20k ( I'm using the Final Settlement Statement at the closing - is that right?)

=Net Proceeds: $130k

Total Capital Gains: $20k ($130k-$110k)

Does your home qualify for the Exclusion of gain? (Pub 523)?

(1) Eligibility Test 1 (Auto Disqual): ANSWER: None apply | RESULTS: PASS

(2) Eligibility Test 2 (Ownership): ANSWER: Yes- bought May 2017 sold Jan 2021 | RESULTS: PASS

(3) Eligibility Test 3 (Residence): ANSWER: Yes- lived in May 2017 sold Jan 2021 | RESULTS: PASS

(4) Eligibility Test 4 (Look-back): ANSWER: No-first house ever owned and sold | RESULTS: PASS

(5) Eligibility Test 5 (Exceptions): ANSWER: None apply | RESULTS: PASS

(6) Eligibility Test 6 (Final Determination): ANSWER: we passed 1-5 for max exclusion | RESULTS: PASS

Marital Status for 21 Tax Year: MFJ

Max Gain Exclusion for 21 Tax Year for MFJ:  first $500k of capital gains 

How much of the Total Capital Gains to be excluded:  100% ( $20k is under the $500k)

HOUSE B: 

   Cost Basis: $200k 

+ Closing Costs: $10k 

+ Improvements:$0k

=Total Adjusted Cost Basis: $210k

Sale Price : $350k 

-Closing Costs: $30k 

=Net Proceeds: $320k

Total Capital Gains: $110k ($320k-$210k)

Does your home qualify for the Exclusion of gain? (Pub 523)?

(1) Eligibility Test 1 (Auto Disqual): ANSWER: None apply | RESULTS: PASS

(2) Eligibility Test 2 (Ownership): ANSWER: No- bought Dec 2020 sold March 2022 | RESULTS: FAIL

(3) Eligibility Test 3 (Residence): ANSWER: No-lived in Dec 2020 sold March 2022 | RESULTS: FAIL

(4) Eligibility Test 4 (Look-back): ANSWER: UNKNOWN | RESULTS: TBD

        *** Q: should we defer the  House A exclusion to help with House B capital gains since they are so much higher???***

(5) Eligibility Test 5 (Exceptions): ANSWER: Yes- Divorce in Feb 2022  but didn't reside 2 yrs| RESULTS: FAIL-                   ***Q: will this allow me to have partial exclusion???***

(6) Eligibility Test 6 (Final Determination): ANSWER: we failed tests 2 & 3 for max exclusion | RESULTS: FAIL-need to determine if qualifies for partial exclusion

Does your home quality for a partial exclusion of gain?

(i) Work-related Move:  No 

(ii) Health-Related Move: No 

(iii) Unforeseeable Event: ANSWER: Yes- Divorce- occurred during time of ownership and residence 

(iv.) Other facts and circumstances: ANSWER: yes i can prove situation causing the sale arose during own and use time, yes i sold home not long after the situation rose, and yes i couldn't have reasonably anticipated this when bought home

Marital Status for 21 Tax Year: SINGLE 

Max Gain Exclusion for 21 Tax Year for Single:  first $250k of capital gains BUT we failed test 2 & 3 so we can't take max

   ***Q: How much can we take?? Is it the the lesser of the # of days between (1) House A sale Date and House B Sale date AND (B) House B Purchase Date and House B Sale Date?***

How much of the Total Capital Gains to be excluded:  61.7% ($154,452.05/$250k)

    ***Q: Do I look at Worksheet 1. Section B of Pub 523??***

                      Step 1. 1.: 469 days 

                      Step 1: 2. 469 days 

                      Step 1: 3. 451 days 

                      Step 2:  451 days /730 days = 0.617808

                      Step 3:  0.617808. x $250,000 = $154,452.05.  **Q: Does this mean we can exclude up to this??**

QUESTION 1: If I have $110k in capital gains in House B and the partial max I can do is $154k and $110k is less than $154k, will I still be taxed? OR is this saying that I still have to pay taxes on 39% (100%- 61%) of the $110k (i.e. $42k)

QUESTION 2: If we took 100% exclusion of House A in 2021, can we take another exclusion for House B in 2022 due to the unforeseeable circumstance-divorce? 

QUESTION 3: If we agree to pay taxes in 2021 on House A 2021gains how does that impact our House B 2022 gains (i.e. does it allow us to lower our House B 2022 capital gains amount thus lowering how much we pay taxes?)

QUESTION 4: Do any of the following closing costs count towards adjusting cost basis (i.e. increase it):

      4a.- loan charges- tax service fee 

      4b.-recording fees

      4c.-city transfer stamps 

      4d.-tax payment fee to title company and transfers

       4e.- stamp fees 

       4f.- loan origination fee- underwriting/processing 

      4g.- loan origination fee- tax service fee 

QUESTION 5: Do any of the following closing costs count towards adjusting gross proceeds (i.e. lowering it):

      5a.- county taxes

      5b.-title related fees 

      5c.-county transfer tax

      5d.-city transfer tax

       5e.- state transfer tax to title company

     5f.- municipal fees to city 

QUESTION 6: I should be using the Final Settlement State to retrieve my closing cost for purchase and sale adjustments as opposed to the Closing Details Worksheet correct?

[RobertB4444]

First, yes your exclusion is 61.7% of 250K, or $154,250.

Q 1.  No, the whole $110K would be excluded from income.  So there would be no tax.

Q 2.  Yes, because of the divorce you can take a reduced exclusion within two years of the first exclusion.

Q 3.  Agreeing to pay taxes on the first one makes no sense.  The exclusion is the same whether you take the first one or not, because of the divorce.  Exclude them both.

Q 4.  All of those are closing costs except the tax payment - the tax payment was deductible in the year that you paid it as part of your itemized deductions.

Q 5.  As I said in question 4, taxes do not count.  Not sure what that municipal fee is, so maybe on that one.  The only other one on that list that counts is title related fees.

Q 6.  Yes, use your final settlement statement to get the amounts to enter.  Also, keep an eye out for a form 1099-S.  The amount on that form should match the gross proceeds on the final settlement statement.  That number definitely needs to appear on your tax return before being adjusted by closing costs and exclusions.