Home Sale Capital Gains On Two Home Sales in 2021 and 2022

[cunhat92]

My wife and I both purchased homes prior to our marriage. In 2021 she sold her home and made a profit of less than $250,000. She met the use and ownership test for the home and sold to move in with me. I will be selling the home I bought this year due to us both leaving the country for work. I have not lived there for 2 years, but I believe I can exclude up to $207K due to living there 20 out of 24 months.

My question is, can she exclude her capital gains for the 2021 tax return, and I can exclude my capital gains for the 2022 return while filing jointly? It said we can only claim this exclusion every two years, so we are unsure if we will be able to claim it twice.  Both amounts are way below the exclusion limits. Would it be wise for us to file married filing separately for the 2021 and 2022 tax returns?

Thanks!

[RobertB4444]

Filing separately will not fix the issue.  You're only allowed the full exclusion once every two years.  However, you can get a partial exclusion for a change of circumstances such as moving for a job.  And it is doubled for Marrying Filing Joint filers-

From the IRS Website for publication 523-

B) Complete this section only if you have determined that you aren’t eligible for the maximum exclusion but are eligible for a partial exclusion. If you are eligible for a partial exclusion, use this section to determine your exclusion limit.

Step 1Determine the shortest of the following 3 periods: 

 1. Your time of residence in the home during the 5-year period leading up to the sale_____

 2. Your time of ownership of the home leading up to the sale_____

 3. The time that has elapsed between the sale and the date you last sold a home for which you took the exclusion, if applicable_____

Step 2Take the smallest period from Step 1 (you may use days or months) and divide that number by 730 (if using days) or 24 (if using months)_____

Step 3Multiply the result from Step 2 by $250,000. Stop here if not married filing jointly_____

Step 4Repeat Steps 1–3 for your spouse and add the two results_____

C) Your exclusion limit is $___________. Unless you have taxable gain from business or rental use (see Business or Rental Use of Home), only gain in excess of this amount is taxable.

Here are the IRS rules on that partial exclusion.

[cunhat92]

We can't differentiate between my wife and me or does the exclusion apply to both of us regardless of filing status?  My wife sold her home on 1 Dec 2021 for a profit of $80K. I will be selling my home in February for a profit of $125K. If we use the date on which she sold her home, I would only be able to exclude $27K. I was never on her deed or mortgage, and she is not on mine. We can't each claim the exclusion for properties acquired prior to our marriage?

Thanks,

[DavidD66]

In the case of a new marriage where one spouse sold a residence within two years before the marriage (thereby disqualifying him- or herself from the exclusion), the other spouse may still exclude up to $250,000 in gain on a residence owned before the marriage.  Your wife's sale does disqualify you from excluding your gain.