Can we claim married but seperately on our taxes in order to sell two primary residences within a two year period without paying capital gains tax?

[beccanoname]

We qualify for a prorated military capital gains exemption on a rental property that was our primary residence for more than fourteen months in the last fifteen years.

We need to also sell our current primary residence that qualifies for exemption due to an upcoming PCS within the same calendar year of when we plan to sell the rental residence.

[NCperson]

I think you may be mixing issues here (and I'm confident others will straighten it out)

The capital gains exclusion is $250,000 per person, so if you file Joint it is $500,000.  Filing Separate it's $250,000 for each taxpayer.   If you sold 2 homes this year, the maximum exclusion is $500,000 - not $1,000,000.  There is no advantage to filing Separate to somehow increase the benefit that I am aware of. 

can you please add some dates to each home situation? it'll help others explain the capital gains situation.  @Carl 

Home #1 - when did you buy (month / year) ? when did you get the PCS orders (month / year) ? when did you rent (month / year) ? how many months did you live in the home since you purchased it? 

Home #2 - when did you buy (month / year) ? when did you get the PCS orders (month / year) ?  how many months did you live in the home since you purchased it? 

[TomD8]

Another problem with your plan is that IRS Publication 523 doesn't describe any military exception to the two-year "look-back" requirement - the rule that you may take the capital gain exclusion only once during a two-year period.

https://www.irs.gov/publications/p523#en_US_2022_publink10008998

[Mike9241]

I don't think the rental property qualifies for any 121 exclusion. while a taxpayer on qualified official extended duty can elect to suspend for up to ten years the five-year test period for the ownership and use tests, the taxpayer fails to meet the 2-year use test. 

[Carl]

I'll start by paraphrasing the rules. Then we'll dig a little deeper into the details.

For starters, weather you file joint or separate has no bearing what-so-ever on your specific situation. Each tax filer gets a $250K exemption for the house you lived in for at least 2 years (730 days) of the last 5 years (1826 days) you owned it. For active duty military you can qualify for a partial exemption "IF" your move was required by military PCS orders. (TDY orders don't count). Each tax filer can only claim one exemption in a two year period.

Understand that the exception for military allows you to suspend (not extend) the day count for ownership period and lived in period, for a maximum of 10 years. If you purchased the property as your primary residence and moved in on Jan 1 2021 and moved out on Dec 1 2023 due to PCS orders, you qualify for a pro-rated exemption since you lived in it 699 days as your primary residence. If your non-military spouse lived in it less days (because you married and she moved in with you later) that too will reduce the amount of the exemption. But not by all that much.

Your day count for days you lived in it as your primary residence stops on the day you checked in to a local hotel or whatever, after your HHG's were picked up. Your day count for ownership stops on the date you reported to your new duty station.

Your day count for ownership resumes when any one of  the below three things occur.

   1. You separate from the military. The day count for ownership starts back up on your date of separation. Does not matter where you may be on the planet on that date.

   2. You are PCS returned back to the area. The day count resumes on your reporting date.

   3. The day count resumes when you reach the 10 year maximum day count suspension period while still active duty.

Without knowing a bit of history for how long each of you lived in each property, it's pointless for me to continue. For each property, need to know purchase/acquisition dates, move in/out dates, PCS dates, and any more details you could provide that would aid in establishing a timeline for everything.

[Opus 17]

There is a special rule when you sell property that you owned before a marriage, I'm not sure that applies here.

Even if you can split your exclusion in the way you want, it's not clear the rental property would even qualify. You say you owned it for 15 years and lived in it as your main residence for 14 months.  You would have to have lived in that rental home as your main home for at least 2 years (731 days) of the past 5 years, not the past 15 years.    The rule about suspending the 5 year rule only applies if you are deployed or on active service at least 50 miles from the home, and that still requires you to have lived in the home as your main home for 2 years.  (For example, if you lived in the home 2 years from 2009-2011, the normal 5 year period to sell the home and use the exclusion would end in 2013.  You can extend it to 2023 if you are on qualified extended duty.  But qualified extended duty does not include living in the same area as the home and renting it, while you live in another home.)

And even if there is some way you could qualify, you still have to pay recapture on 15 years of depreciation, that recapture tax is paid before the exclusion is calculated. 

[Hal_Al]

Q. Can we claim married Filing separately (MFS) on our taxes in order to sell two primary residences within a two year period without paying capital gains tax on either home?

A. No.  You may only claim the exclusion on one home. But you may choose which one you claim. Filing MFS is not a way around that rule. 

"Eligibility Step 4—Look-Back

Determine whether you meet the look-back requirement.

 If you didn't sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn't take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period."

https://www.irs.gov/publications/p523#en_US_2022_publink10008939