Capital gains when selling two "primary" homes in same year

[iJustDrevay]

Trying to understand the tax implications of selling two homes in the same year:

• 1 year ago turned primary Seattle based home into a rental and moved across state, bought a new home with cash and moved in.
• Two months ago, we closed on the sale of our Seattle home, and walked away with 499k after it was said and done. Putting us in a good tax situation to avoid capital gains as a married couple. (We lived in that house for two consecutive years within the past five years, and it has been a rental for the last year.)
• The house we’ve been living in for the past year in Spokane. We bought cash, 330k. We’ve already done nearly 40K in improvements and upgrades.

Fast forward to now, we found a new house we want to buy for 600k. We could probably buy it cash or we could pull out a small mortgage on it. We haven’t decided.

• Do we sell the house we are currently living in (14months now) and just focus on the next primary home? 
  • From my understanding we can not sell this Spokane one within the same time frame of selling the Seattle one and also avoid capital gains. Also, I don’t think this house would sell for much more than what we bought it for.
  • Someone told me we don’t need to count it as a primary residence, but as an investment property, even though we’ve been living in it for a year.

So I wanted to ask if you could help advise us in this matter. Ideally, yes, we would love to just sell this one and only have one primary home and no more rentals. We just need to know what the tax implications are, and if we can avoid capital gains since we’ve already sold one house in Seattle and what it would look like if we were to sell this one in Spokane.

[Mike9241]

sale of Seattle home. since you mentioned you owned it and both of you occupied it for 2 out of 5 years your entitled to the full home dale exclusion of $500,000 except that depreciation taken while a rental is recaptured as taxable section 1250 gain. you mentioned the cash you walked away with but that may not be what you use.

gain =

selling price

less cost including improvements

less selling expenses

add depreciation larger of allowed or allowable  

up to $500,000 of the gain is excludable except for the amount of depreciation.

example 1) gain $450K only the amount in excess of the depreciation is excludable

example 2) gain $750K $500K excludable the excess gain to the extent of depreciation is taxed as section 1250 capital gain (maximum tax rate about 25%) the excess is taxable at the long-term capital gain rate which varies based on a number of factors but would be less than the section 1250 rate

as to the new home no specific reason was given for sale like health, change of job location or certain other circumstances. without any of these any gain would be taxable as long-term capital gain while any loss would not be deductible.

normally there has to be 2 years between sales for the second home to qualify for the full home sale exclusion. However, there could be a partial exclusion if the reason for the sale of the second home was due toto issues of health, change in place of employment or unforeseen circumstances. there are specific criteria for each of these. 

[NCperson]

@iJustDrevay - the mortgage have nothing to do with determining whether there is a capital gain. 

Capital gain is simply Selling Price Less Selling costs Less original Purchase Price less improvements.

If you "walked away with $499k" but that statement includes paying off the mortgage, then you walked away with a lot more than $499k in terms of capital gains. 

If you are selling this 2nd home for convenience, you must have lived and owned the home for the past two years to be eligible for the exclusion.  Further, the sale date of this home must be at least two years from the sale date of the first home, as you are only eligible for ONE exclusion every two years.  So if you have lived in this home for 14 months, but just sold the first home two months ago and took the exclusion on that home, you have only satified two months of the 24 month requirement so far on this second home..