Home sale extra exclusion for gain of prior home not claimed earlier. Turbo allows both that and the 250000?

[gbdwphx]

I find this confusing but highly beneficial. Prior home sold in 1985 gain helps a lot for 2022 sale of newer home. Confusing paperwork, tho.

[gbdwphx]

Turbo provides the forms to claim this potential deduction but the IRS Pub 523 makes no mention of it.  IS THIS LEGAL??

[Mike9241]

there was a tax provision many years ago that allowed deferral of gain if a new home was bought within 24 months of the sale of the old one for at least the amount of the gain.   the catch was that your tax basis for that new home had to be reduced for the gain that wasn't taxed. so if you did this your basis in the home you just sold (assuming this is the replacement property) is what you paid + improvements since the purchase reduced by that deferred gain.  the difference between the sale price of the current house and its tax basis is your current gain. if you meet the rules for ownership and occupancy you can use the current rules for home sale exclusion.   

[JohnB5677]

The law on the sale of a home in 1985 was:

You must defer your gain on the sale of your residence if, within the period beginning two years before and ending two years after the sale of your principal residence, you purchase and live in another principal residence whose cost equals or exceeds the adjusted sales price of your old residence.

In such case, you do not have the option of paying or not paying the capital gains tax. The law bars you from paying it.

Instead, you must subtract any gain that is not taxed in the year you sell your old home from the cost of your new home. This gives you a lower basis in the new home. If you have more than one home, you postpone the gain only on the sale of your principal home.

This still holds true.  Publication 523  Selling Your Home  has a worksheet on page 12 Line L: Any gain you postponed from the sale of a previous home sold before May 7, 1997.

[rjs]

It is legal, but you might be doing something wrong, or just looking at the results wrong. The postponed gain on the home that you sold in 1985 would increase your tax now, not decrease it.

The only mention of the postponed gain in Pub. 523 is buried on line 5l of Worksheet 2 on page 13, "Any gain you postponed from the sale of a previous home sold before May 7, 1997." You can see this in the image that JohnB5677 posted.

If you used the EasyGuide in TurboTax to calculate the basis of the home that you sold in 2022, it asked you the amount of gain that you "rolled over" from the home that you sold in 1985. That would be the amount from your 1985 Form 2119, line 13, "Gain to be postponed."

The postponed gain is subtracted from the original purchase price of the home you sold in 2022. That decreases your basis, which increases your gain on the sale.

Another way of looking at it is that your taxable gain now is the actual gain on the home you sold in 2022, plus the postponed gain from 1985.

If your taxable gain, after adjusting for the postponed gain, is more than the $250,000 that you can exclude, the postponed gain has increased your taxable gain, so it has increased your 2022 tax.

One other factor that might come into play is that the gain on your home is long-term capital gain. If your total income, including the gain on the home, is quite low, it's possible that some or all of the gain is being taxed at 0%. The income cutoff for the 0% rate depends on your total taxable income, the amount of the taxable gain, and your filing status. It could also be affected by any other long-term capital gains or qualified dividends that you have.