Real Estate Capital Gains Exclusion

[acald11]

I purchased my home in 2017 while single, my wife purchased her home in 2019 while single.  I have rented my home for the last 2 years but it can still qualify as a primary residence as I've lived in it for at least 24 months out of the last 5 years.  We got married in 2023 and we live in her townhome although I was never added to any of the home documentation.  I am hoping to sell my original place while I still qualify for the capital gains tax exclusion of $250k (I'll have about that in profit after sale) in early 2025 -- will she also be able to qualify for the capital gains tax exclusion if we decide to sell her home as well? Any advice on how to avoid a huge cap gains hit in this situation would be much appreciated. Thanks!

[Opus 17]

You can each claim a $250,000 exclusion on the homes you previously owned, or you can claim a $500,000 exclusion on the home where you both now live (which seems to be "her" home from 2019) and not use the exclusion on your home.

Note that marriage imparts ownership but not residency.  You are deemed to "own" the 2019 townhome for more than 2 years if your wife does, but you have to figure out how long you have actually lived there as your main home (her ownership attaches to you but not her residency).  So whether the $500,000 exclusion on the 2019 townhome is even an option will depend on exactly when you moved in and when you want to sell.  If you sell the townhome after you have lived there less than 731 days, you aren't eligible for the joint exclusion of $500,000, only her single exclusion. 

Also note that, even if you use your $250,000 exclusion on the sale of the 2017 home, you will still have to pay depreciation recapture on the depreciation you took or could have taken while it was a rental, the recapture is not eligible for the exclusion.

You haven't discussed the likely gains on the two properties, so only you can really tell whether you should pay the full tax on 2017 and use $500,000 on 2019 or use $250,000 each on 2017 and 2019. 

[acald11]

Thank you for the response, very helpful.  We'll both net ~$200-250k profit on each house whenever we sell them.  I wasn't sure if how we filed our taxes matter or whether we can both leverage the $250k exclusion separately on each of our properties now that we're married.  You're correct, we live in her home that she purchased in 2019 and I've rented my 2017 home out for the last 2.5 years (moved in with her July '22).  I have until August '25 to sell it before it's ineligible to be considered my primary residence (at least how I understand it)...