Selling multiple primary residences due to marriage question

[cblake165]

I bought a home - home A - in 8/12 and lived there until 8/14 (2years exactly) then rented for just less than 3 years. I got married in 12/14. My husband bought home B in 4/14 and I moved in 8/14. We sold home B 4/17 and plan to exclude gain (approx 50k). We moved Into home A (where he has never lived until now) in 7/17 and plan to sell in 4/18 at a gain. Can we now exclude the gain of  home A since I lived there before marriage enven though we are taking the exclusion the year before. 

[Hal_Al]

No. You will have to live in home A until at least 7/19 to be able to exclude the gain. The two years (8/12 to 8/14) you previously lived in it don't count any more, because more than 3 years has passed between moving out and moving back in. 

In addition, if you do wait  to meet the 2 out of 5 year requirement; the portion of the gain (approx 43%) attributable  to the rental time will be taxable. This is in addition to the depreciation recapture

[Opus 17]

You have to live in home A for more than 2 years (731 days) of the 5 years prior to the sale. Assuming you moved in 7/1/17 and will sell on 4/30/18, that is 304 days.  Assuming you moved out 8/31/14, then the number of days between 4/30/13 (5 years back from the sell date) and 8/31/14 is 439.  That gives you 743 days which is more than the 2 years needed for the exclusion.  So your spouse can use her exclusion for home B and you can use your exclusion for home A.

You will need to determine the exact # of days based on your specific move and sell dates.  If my assumptions were too generous, it could very well be that you won't have 731 days until some future time.  And if you don't have 731 days, you can't use the exclusion at all.

However, even if you have 731 days of the past 5 years, there is a provision in the tax law that changes how the exclusion is handled if you move back into the home.  Instead of just accounting for deprecation, you also have to count the rental period as "non-qualified use."  This is unfortunately not well described in IRS publication 523 on home sales.  It's complicated and I think they gave up on trying to explain it.  But Turbotax does include the calculation.  

Basically, you will owe recapture on any part of the gain that is due to depreciation during the rental period.  Then you will also owe capital gains tax on the percent of gain due to the rental period (Hal suggests 45% based on your figures).  The gain left over after the depreciation recapture and the non-qualified period would be eligible for exclusion (if you meet the 731 days).

[Opus 17]

You each get a separate $250,000 exclusion on the home you owned previously.  She would use her exclusion only on home B, and then you can use your exclusion only on home A.  Then in the future, you would have to wait 2 years from the sale of home A to use what will then be a combined marital exclusion.

However, if the gain on home A will be more than $250,000, you have the option of combining your exclusions for home A and paying the gains tax on home B.

Also, because of the rental period, you will owe some depreciation recapture on home A that is not subject to the exclusion.

[Opus 17]

The above is true but I did not carefully take the dates into account.  Hal's answer is better.

[cblake165]

We (or I) meet the 2 year out of 5 period in home a, it was rented just less than 3 years- I should have made that more clear. The part I'm confused is the rules say you can only take one gain excluding every 2 years. I just owned the property before we were married and lived there 2 years. I've moved in less than 3 years later, so have now extended my 2 years it that makes sense. We mfj and will take the exemption for home b this year but are trying to determine if we can take another one next year if we sell home a. Each property probably has a gain of less than 50k.

[Hal_Al]

Yes, even though you are filing as Married Filing Jointly (MFJ), you may each claim an (up to) $250,000 exclusion on two separate houses. You do not need to wait 2 years after selling the first house to sell the 2nd.  You must meet the 2 out of 5 year rule for your house (he does not have to meet it) and he must meet the 2/5 rule for his house (you do not have to meet it)

[Opus 17]

You need to be very careful about the dates.  You have to have lived lived there 731 days of the past 5 years AS OF THE DATE YOU SELL, not as of today.  

When selling your homes that were owned before the marriage, you and your spouse have the option of using each of your individual $250,000 exclusions on the home you owned before the marriage.  So instead of using a joint $500,000 exclusion on one of the homes, your spouse would use her $250,000 exclusion when selling the home she owned before the marriage, and you would use your $250,000 exclusion when selling the home you owned before marriage.  (Assuming you meet all the other qualifications.)

[cblake165]

Great - thank you!  This is what I was thinking, we are trying to decide if we sell this spring or next. We specifically moved back in so I know we will meet the date requirements.