Best strategies to avoid the Capital Gains hit for Selling and Buying 2-Homes within a 2-year period (actually all in 2021).

[harrymike2tax]

Best strategies to avoid the Capital Gains hit for Selling and Buying 2-Homes within a 2-year period.

This calendar year of 2021, we have some tricky tax situations that need navigated.

1. Lived in mountain home from 1994 to 4/2019, I bought for $140K.
2. On 2/2019, we bought new for $577K, Hemlock Broomfield.
3. On 6/1/2019, we leased the mountain home until 3/31/2021, trying to sell to meet the 2 of 5-year rule.
4. We sold Mountain home on 5/28/2021 for $565K.
5. We used proceeds to buy future downsize home in 55+ HOA, to use as Rental until we were ready - Curtis, Broomfield for $455K - purchase date 6/11/2021 and signed 1-year lease starting 7/1/2021.
6. Wife fell in love the idea of no more yard work and want a larger place in the 55+ community and we bought one for $625K for Primary Residence Carla, Broomfield, purchased on 8/10/2021.
7. Finally, we sold or Hemlock, Broomfield home for $790K on 9/8/2021 and moved to Carla home for permanent residence.
8. Side notes, only Rental period for mountain home ever was time we moved to Hemlock home.
9. At mountain and hemlock home, I ran Schedule-C business from home office for close to 15-20 years, need to look back and count depreciation's taken.

"Exchange", not sure about this, did buying the 2 other homes benefit?

Bottom-line, the home I owned for 27-years was converted to Rental on the 25th year and we only sold to avoid paying capitol gains outside the 2-of-5-year rule, because we decided we would not move back into it the future.

FYI, our married tax rates are for combined incomes close to $250K a year.

Thanks ahead for any discussion or advice on this.

[Critter-3]

You can only exclude the gain on ONE personal residence in a 2 year period so if you have 2 homes that qualify for the exclusion then you can choose which one to take the exclusion on but you cannot take it twice.

[Opus 17]

There's no "strategy."  The old rule to postpone gain by purchasing a new home was eliminated in 1997.  Each transaction is treated on its own.

1. Mountain home bought 1994, lived until 2/19, sold 5/21.

You qualify to exclude up to $250,000 (or $500,000 if married filing jointly) of your capital gains, and will pay long term capital gains on the rest.  If you were carrying forward a capital gain in 1994 (from the old rule) then you must reduce your cost basis for calculating the gain.  You must also reduce your basis (depreciation recapture) by the depreciation you claimed or could have claimed while renting the mountain home.  You can also reduce your gain if you can document increases to your cost basis like certain closing costs and improvements.  See page 8 of publication 523.

https://www.irs.gov/pub/irs-pdf/p523.pdf 

2. Hemlock purchased 2/19, sold 9/21.

You also qualify to exclude your gain on this home, assuming you lived in the home as your main home for at least 2 years (731 days, do not have to be consecutive).   However, you can only use your gains exclusion once every two years, so you  will have to decide whether to use your exclusion on the Hemlock house or the Mountain house, and pay the full capital gains tax on the other.  (Generally, use the exclusion on the home with the larger gain, of course.)

3. Curtis, bought 6/21 and rented out.

4. Carla, purchased 8/21

Irrelevant, neither of these situations affects the tax on the sale of the Mountain or Hemlock home. 

[Mike9241]

it seems your talking about 4 homes

a) mountain home sold  5/28/21 owned and occupied for 2 out of 5 years before the sale. rented and used for a home office which means depreciation should have been taken 

b) Hemlock sold 9/8/21 owned and occupied for 2 out of 5 years before the sale. Never rented

c) Curtis being rented

d) Carla primary residence

only one of the homes sold in 2021 can qualify for the exclusion. since the biggest gain seems to be on the mountain home that's the one I would choose. Note that since it was a rental and used as a home office before the exclusion applies you must recapture the depreciation allowed or allowable. if you did not depreciate it, turn to a pro because the law says even if you didn't take a tax deduction for depreciation on it upon sale you must recapture the depreciation you should have taken. since it seems your cost basis was less than the FMV, depreciation should have been computed using the cost basis after subtracting the value of the land when bought.

[harrymike2tax]

Thanks all for the advice, rules are pretty clear on only exception in 2-years, but Wife is Happy!

[Opus 17]

You don’t qualify for a partial exclusion on the second sale, because the reason does not fall under the category of an unforeseen financial circumstance or hardship as described in the regulations and publication 523 beginning on page 6.  Even if you did qualify for a partial exclusion, the exclusion would have been based on the time since you last used your exclusion, In other words, the four months between the sale of the mountain home and the Hemlock home.  That’s 4/24th, or 16% of $500,000, equals $83,000 of excludable gain.  That’s the maximum exclusion on the sale of the second home, but only if you meet one of the special hardship rules, which it does not sound like you do.

[DravJohnson]

@Opus 17 I've got one for you sir. 

TX home - bought as primary residence 9/2015, had tenants 5/2019 to 05/2021, sold 05/2021

FL home - bought 05/2021 and will sell due to a work relocation back to TX 12/2021

Does the FL home qualify for a partial exclusion (7/24) due to a long distance move due to work?

[Mike9241]

yes you do. the code and regs provide that taxpayers who do not meet the 2-year and ownership tests or who used the Section 121 exclusion more than once in a two-year period may qualify for a reduced exclusion. your job change would be a safe harbor reason.

the exclusion is based on the lesser of the number of months {or days] used and owned or the number of months (or days) since the last sale using the 121 exclusion. the less of these two periods is divided by 24 months (or 730 days) 

[Opus 17]

@DravJohnson 

Assuming no other hidden factors, you can claim a partial exclusion on the Florida home sale because it was due to a job related move.  

You can take an exclusion on the sale of the Texas home, although you will have to pay depreciation recapture on the depreciation that you took or could have taken while it was a rental.

You can then claim a partial exclusion on the sale of the Florida home because it was due to a job-related move. The exclusion is based on the shortest of three time periods:

1. The number of days you actually lived in the home as your main home.

2. The number of days you owned the home.

3. The number of days between the closing date and the last time you used the exclusion (which would have been May, 2021).

Keep records related to the factors qualifying you for the partial exclusion for at least three years in case of audit.