Can we avoid Capital Gains tax when we sold a two primary residences in same year?

[tommywhitt]

In 2024, my wife and I sold a primary residence we lived in for 4 years for an approximate gain of $115k -- she was the only owner. Also in 2024, we sold a rental property, that we previously lived in as a primary residence for over 24 (non-consecutive) months, for an approximate gain of ~$125k-175k -- we were joint-owners. Is there a way to sell both of these properties as "primary residences" to avoid capital gains? Would we have to file separately? Any advice is much appreciated 

[DianeW777]

It depends. Only one spouse must meet the ownership requirement. Since you both owned the second property then you must decide which property will provide the greatest reward for you on a joint return. There is only guidance for separated or divorced taxpayers,  not filing separately while still together. You will not be allowed to take an exclusion for two different homes.

• IRS Publication 523
• IRS Code Section 1.121.2 (see last page example 3)

Eligibility Step 2—Ownership

Determine whether you meet the ownership requirement.

If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.

Next is the added information when a home was used as a rental property and a home. The information below will explain how the excluded and taxable gain will be determined because of depreciation recapture and rental use period.

If you have Passive Activity Loss Carryovers from a Prior Year for your Rental Property in TurboTax Online or TurboTax Desktop:

1. Search (upper right) > type rentals > Click the Jump to.. link
2. Click Start (or Revisit) next to Rental Properties and Royalties (Sch E)
3. Click Yes
4. Click Continue
5. Click the Edit button next to the rental you'd like to add info for
6. Click Continue until you reach the screen entitled Do any of these situations apply to this property?
7. Scroll to the bottom of this page and check the box next to I have passive activity real estate losses carried over from a prior year. 
8. Click Continue
9. You'll be able to input the carryover amounts on the next screen
10. In Property Info be sure to indicate it was sold and when prompted select Special Handling (this stops TurboTax from looking for sale information in the rental).

When you enter the home sale in TurboTax it will ask for a couple of items that are needed to report the sale correctly.  

1. The total depreciation expense that was allowed during the period it was available for rent.  Check your prior tax returns for this figure or the current return if the rental is still part of it in 2024.
2. The number of days the property was available for rent during the ownership period.

Results:

1. The amount of depreciation that was allowed will be completely taxable up to the amount of gain received on the sale.
2. The remaining gain if any, will be split between taxable and amount eligible for exclusion by using the following formula.
   • The total days available for rent will be divided by the total days owned to determine the portion of the remaining amount of gain that is taxable for the rental period
   • The balance will be eligible for the home sale exclusion
3. TurboTax will do all the calculations based on your entry