Capital gains tax on 2nd home?

[Onguard2000]

I’ve lived in my primary residence nearly 3 years and am planning on buying a new home next month (will be new primary residence) and moving in without first closing on my existing home (will be listed for sale soon). 

After looking at the tax code, in addition to having lived in a primary home for 2 out of 5 years, it seems you can only have one primary residence to qualify for the capital gains exclusion so I’m wondering once I close on the new home, will I be taxed at the capital gains rate of 15% when going to sell my first home within a few months?

If so, what is the best way to avoid capital gains tax other than telling my lender to list the loan for the new home as an investment property or attempting to push the closing out to a later date and hoping I sell my first home before the closing date on the 2nd home?

What is the final determination of what a primary residence is (e.g. where your mail is delivered, loan type, where you physically live)?

[Onguard2000]

After re-reading the tax code, another way to avoid capital gains taxes if moving to a new primary home before selling your existing home appears to be if “other facts and circumstances” apply:

Other Facts and Circumstances

Even if your situation doesn’t match any of the standard requirements described above, you still may qualify for an exception. You may qualify if you can demonstrate the primary reason for sale, based on facts and circumstances, is work related, health related, or unforeseeable. Important factors are:

• The situation causing the sale arose during the time you owned and used your property as your residence.

• You sold your home not long after the situation arose.

• You couldn’t have reasonably anticipated the situation when you bought the home.

• You began to experience significant financial difficulty maintaining the home.

• The home became significantly less suitable as a main home for you and your family for a specific reason.

I

[Onguard2000]

So does the below "facts and circumstances“ test from the IRS mean that if I have two homes yet leave my address alone on voter registration/license until I sell my existing home that I’ve lived in for 3 years, I pass the “facts and circumstances“ test?

It seems like I can move to a new home or live in both temporarily, but wait to update my address to pass this test, is that accurate? 

Sale of your main home.

You may take the exclusion, whether maximum or partial, only on the sale of a home that is your principal residence, meaning your main home. An individual has only one main home at a time. If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a "facts and circumstances" test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well. They are listed below. The more of these factors that are true of a home, the more likely that it is your main home.

• The address listed on your:

  1. U.S. Postal Service address,

  2. Voter Registration Card,

  3. Federal and state tax returns, and

  4. Driver's license or car registration.

• The home is near:

  1. Where you work,

  2. Where you bank,

  3. The residence of one or more family members, and

  4. Recreational clubs or religious organizations of which you are a member.

Finally, the exclusion can apply to many different types of housing facilities. A single-family home, a condominium, a cooperative apartment, a mobile home, and a houseboat each may be a main home and therefore qualify for the exclusion.

[Mike9241]

you misunderstand the rule is the house sold must be your principal residence for both the ownership and use test for 2 out of five years before sale which it was. this is different than primary residence of which you can only have one at a time.

from reg 1.121-1

Principal residence. In the case of a taxpayer using more than one property as a residence, whether property is used by the taxpayer as the taxpayer's principal residence depends upon all the facts and circumstances. If a taxpayer alternates between 2 properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer's principal residence. 

the home you are selling does not have to be your principal residence at time of sale. all that is required is to meet both two-year tests at the time of sale.

[Onguard2000]

Based on your response, the “facts and circumstances" test doesn’t apply in my situation?

[NCperson · Accepted solution]

@Onguard2000 you are making this WAY too complicated.

On your current home, you are eligible for the capital gains exclusion as long as you owned and lived in it for 2 of the last 5 years.  Simple.  And you state you have lived in it and owned it for 3 years, so you qualify. . 

So you move to your new home and have yet to sell your first home.  Let's say it takes 6 months to sell the original home.  You still get the exclusion because you owned and lived in it for 2 of the past 5 years.  (it doesn't say it is the immediate 2 years, it is just 2 of the past 5) 

So if you lived and owned the home for 3 years, and you were to move to the new home today,  as long as you sold the 1st home within a year, you could still say you owned and lived in it for 2 of the past 5 years.  

Now, all that means is when you go to sell the new home, you are not elgiible for the exclusion again until you have owned it and lived in it for 2 of the last 5 years.  Further - you can't take the exclusion but once every two years.  So even if you satisify the 2 of the last 5 rule for the new home, you wuould also have to wait until it has been 2 years (so 2.5 years in this example) from the closing of the first home until the closing of the 2nd home to qualify for the exclusion on the 2nd home.   But if you plan to live in and own  this new home for many years, delete this paragraph! 

[Hal_Al]

@Onguard2000  said "it seems you can only have one primary residence to qualify for the capital gains exclusion"

That's a true statement, but it's not relevant.  

Q, I’m wondering once I close on the new home, will I be taxed at the capital gains rate of 15% when going to sell my first home within a few months?

A. No. You never had two primary residences at the same time. Your first home was your primary residence for the 2+ years you lived in it, prior to your move to your new primary residence.  It stopped being your primary residence, when you moved. That means  you have 3 years, from the move out date to sell it and still qualify for the capital gain exclusion (to meet the 2 out of 5 years rule). 

[Onguard2000]

“So if you lived and owned the home for 3 years, and you were to move to the new home today,  as long as you sold the 1st home within a year, you could still say you owned and lived in it for 2 of the past 5 years.”

Don’t you mean as long as I sell the first home within 2 years in your example for the maximum ownership period of 5 years?

I’m referring to Publication 523 (2022), Selling Your Home (

https://www.irs.gov/publications/p523#:~:text=If%20you%20own%20and%20live,factors%20are%20relevant%2...)

I think you’re only looking at the “Eligibility Test” for maximum exclusion of gain on the above link.

If you read the above link, there’s also some “preliminary items” which includes the scenario of multiple homes: “If you own or live in more than one home, then you must apply a “facts and circumstances” test to determine which property is your main home.”

Correct me if I’m wrong, but what what you’re saying is the “facts and circumstances” test is not relevant and it wouldn’t matter (still would qualify for capital gains exclusion) if I changed my address (e.g postal, license, voter registration card, etc.) to my new home address immediately after closing on it and moving in?

It doesn’t appear the IRS explicitly distinguishes between the words “primary,” “principle,” and “main home”; they all mean the same thing.

[NCperson]

@Onguard2000 my apologies..... let's use a specific example.  

Let's say House #1 was purchased on July 1, 2020 and you lived and owed it until Sept 11, 2023, when you closed on and moved into House #2.   You still own House #1, but do not live in it. 

House #1 is placed on the market.  As long as House #1 is sold by Sept 11, 2026, you still would meet the test of owning it and living it in for 2 of the past 5 years.  On that date, the measurement period would be from Sept 12, 2021 - Sept 11, 2026 and during that 5 year span you lived and owned it from Sept 12, 2021 - Sept 11, 2023.  After Sept 11, 2026, you would no longer be able to say you lived and owned it for 2 of the last 5 years (and technically, it's 730 nights). 

Now, in fact, House #1 sells on March 1, 2024.   In order for you to qualify for the exclusion on House #2, you could not sell it until March 1, 2026.  While you would meet the two years ownership and residency test on Sept 11, 2025, you can't use the exclusion more than once in a two year period, so you'd have to wait until March 1, 2026 to sell House #2 and get the exclusion.  

[Mike9241]

@Onguard2000 yes there is a definition for those words. during the year at what location did you spend the most nights.  so, if you own two homes at the same time,  it is possible that one year home A is your primary/main/principal residence and next year the other because of the nights used each year as your residence.  so say A is your residence in calendar year1 for 190 days (making it your principal/primary/main home in year 1) B for the remainder. for the next 2 years you occupy B 300 days for each of those years and A for the remainder making B your primary, etc  residence for those 2 years

in year 4 you occupy A for 300 nights and in year 5 you occupy A for 240 nights making it your primary, etc residence for those 2 years.

you have now occupied A for 730 nights in the 5 year period when it was your principal residence so you qualify for the home sale exclusion on A. This despite the fact that B was your principal residence for 600 nights during the 5 years and in fact occupied for 965 nights in the 5 year period. the days A was used as a residence in years 2 and 3 don't count because it was not your principal residence during those years. the days B was used as a residence in years 1, 4 and 5 don't count for B because it was not your principal residence during those years. 

[VolvoGirl]

First of all, forget about the new house.  That  doesn't matter for anything.  It's simply when you sell the first house.  Then you look back 5 years from the date of sale.   If you owned and lived in it for 2 years of the last  5 years.  Any 2 years, doesn't have to be 2 years in a row.  Just any 720 days.  

[Onguard2000]

Your response covers the “Eligibility Test” for maximum exclusion of gain on the below link but doesn't address the “facts and circumstances” test regarding multiple homes.
The “facts and circumstances” test could be interpreted that not only do you I need to have lived in the home for 2 out of the last 5 years, but that I might have to pay capital gains tax if I update my address (drivers license, mailing address, etc.) to the new home before closing on the home I've lived in for 3 years and don't live there anymore since you can only own one main/primary/principle home at a time.

The explanation is not clear and vague on the below IRS link "The more of these factors that are true of a home, the more likely that it is your main home." Both homes are also near where I bank or go to recreational clubs. I have spoken with someone in the real estate industry, and they said they haven't heard of people in similar situations being forced into capital gains taxes over an address change, but I don't want to be the first.

https://www.irs.gov/publications/p523#:~:text=If%20you%20own%20and%20live,factors%20are%20relevant%2....

[NCperson]

@Onguard2000 - you are truly overthinking this.  

I do not believe anyone on these boards is going to convince you otherwise.  

[Onguard2000 · Accepted solution]

@NCperson which is why I had to ask the question on a different forum and got an answer that actually answered my “facts and circumstances” test question:

Those factors really only come into play if you owned more than one house and you were spending time staying in both of them, and it's a little fuzzy which is really your "primary" residence. If you aren't living in the new home, if you're only really living in the original one, then that's the only thing that matters, and there is no doubt that you qualify. The address change isn't a problem.

Assuming that's really where you're still living, I would keep whatever documentation you can to prove that if the IRS questions it (pictures, bills, etc.). If you've moved your stuff into the new house and you're spending time there and sleeping there, then I would be concerned and then you should look closely at those "facts and circumstances".