Capital gains laws for two primary residences lived in 2 of 5 years

[proudapron]

Hello!

This is my first post into the community.  I have a unique situation where I owned and lived in two homes for 2 out of the last 5 years, and will be selling both of the homes this year.  Here are the property details:

Home 1: Lived in 4.5 years ago - 2 years ago (2.5 total years), then converted into a rental property after we moved 2 years ago

Home 2: Lived in 2 years ago - last month (2 total years) and listing for sale

Here's the question: Can I sell both properties and not pay capital gains on both of them?

Thanks!

[tagteam]

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@proudapron wrote:

Here's the question: Can I sell both properties and not pay capital gains on both of them?

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Welcome to the Community.

First of all, it is 2 years out of the last 5 years leading up to the date of the closing, just so that is clear in the event the first house does not close according to your timetable for the sale.

More importantly, though, is the rule that you can use the exclusion only once during a 2-year period.  Treas. Reg. §1.121-2(b)

So you clearly could not take the Section 121 exclusion on both houses unless they sold more than 2 years apart. 

See https://www.irs.gov/publications/p523#en_US_2018_publink10008962

[proudapron]

Thanks for your great reply! So I would be able to claim the exemption from house 1 instead of having to claim it on house 2, correct? Or am I forced to claim it on house 2 since it was our most recent property that we lived in?

[NCperson]

You may want to decide which to claim It on once they actually sell....

If homies #1 doesn’t close with in 6 months , you begin to violate the “24 of the last 60 month” rule

So best to determine which gives you the best benefit if they both sell. Also , since house #1 was rented, there is depreciation that effects the cost basis so it makes the determination a little bit more complex

Why not wait until the end of the tax year to decide which one to take the exemption on?

[proudapron]

I just wanted to be sure that we could take out the exemption on either house. Right now we have a lot of equity in house 1 and I'm not sure if we should sell it if we're guaranteed to get hit with capital gains.

Good to hear we have options though!

[tagteam]

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@proudapron wrote:
Right now we have a lot of equity in house 1 and I'm not sure if we should sell it if we're guaranteed to get hit with capital gains.

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I agree with @NCperson, specifically, you should wait until the houses actually sell and then make a decision. 

Regardless, I believe you meant you have a lot of unrealized gain in House 1 since the amount of equity is irrelevant to the calculation of capital gain. In that event, you are pushing the envelope with respect to the 2 out of 5 rule on that property while you have quite a bit of time left on House 2. Therefore, you might want to use your exclusion on that one so it is not essentially lost.

[NCperson]

The “equity” is not the issue .... it’s the difference between the sales price and the original purchase price less depreciation that is the issue .... “equity” would infer changes in the mortgage balance which is not part of capital gains

[NCperson]

Tagteam2 - sorry I responded without reading your entire response

[tagteam]

No problem @NCperson - we can't tell if someone else is responding to a post here like we can on the other TurboTax forum.