Exception to two-year home sale capital gains exemption rule

[BIC2]

My wife & I lived together in two small, connected, adjacent homes. Both were simultaneously primary residences.  We lived in both for more than the last five years. We sold one in 2019 with under $250,000 capital gains.  We plan to sell the other in 2020 with less than $250,000 capital gains.

Since there can only be one primary residence, we can claim one as a primary residence in 2015 & 2016; the other, in 2017 & 2018.

Can we file jointly and claim the $250k + $250k exemptions in 2019 & 2020.  If not, can we file MFS (single) for 2019 & 2020 and each claim the $250k + $250k exemptions.  From what I've read in some places, either scenario is exempt from the requirement to sell the two homes at least two-years apart since we're not exceeding the $250k + 250k or $500k joint exemption.  Thanks.

[NCperson]

can you add a few details to the situation? 

did these two homes have different street addresses? which did you and your spouse declare as your "home address" in 2015 and 2016? which address did you sleep in at night?  did you change where you slept in 2017? 

were the homes titled differently? 

is one really a primary residence and the other a 'second residence'? Only the primary residence gets the benefit of the $500,000 exclusion.  

I am interested in what others have to say...... I just have the questions...

[BIC2]

They have different street addresses. Some features & utilities were joint, some not.

As the houses are small, about 1000 sq ft each, the house we usually slept in had one bedroom, the other house had two guest bedrooms & home office.

We got mail at both houses, mostly business mail at the one with the home office. They're both titled the same, in a living trust, but are separate titles.

[NCperson]

I suspect you have read IRS publication 523... look at the 'facts and circumstances' tests when you own more than one home.  

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

• what address is on your drivers license? did you change that in 2017? 
• what address did you use when you voted? did you change that in 2017?
• what address did you use on your federal tax returns? did you change that in 2017? (and remember with this one, the IRS knows the answer so if ever audited, they can determine whether you moved to a different primary residence!) 

if you didn't go through those specific steps of changing those documents in early 2017, I do not see how you can say you lived in both houses as your primary residences to claim the exclusion on both of them over this period of time.  

Sale of your main home (from publication 523)
An individual has only one main home at a time. If you
own and live in just one home, then that property is your
main home. If you own or live in more than one home,
then you must apply a "facts and circumstances" test to
determine which property is your main home. While the
most important factor is where you spend the most time,
other factors are relevant as well. They are listed below.
The more of these factors that are true of a home, the
more likely that it is your main home.
• The address listed on your:
1. U.S. Postal Service address,
2. Voter Registration Card,
3. Federal and state tax returns, and
4. Driver's license or car registration.

Simply, you can't have two primary residents at the same time.  You live in one or the other.   It would be like arguing that both my city home and my beach home are primary.  the only difference here is the distance between the two homes is negligible.

Here is how I see it... and others may have a different view.

1) you lived in Home A during the years of 2015-2019.  Let's assume it's the home with the bedroom.  You sold it in 2019 and since you lived there more than 2 of the last five years, any gain is excluded if it was less than $500,000.  You'd have to have moved to House B and lived in it for two years after selling House A to get the exclusion.

2)  you lived in Home A during the years of 2015-2019.  Let's assume it's the home with the bedroom.  You sold Home B  in 2019 and since you did not  live there more than 2 of the last five years, any gain is subject to long term capital gains (if in fact there was a gain) 

3) you lived in Home A during the years 2015--2016.  Then you physically moved to Home B in 2017 and you can prove it via the 'facts and circumstance' tests.   you sold Home A in 2019;; the capital gains exclusion would apply since you had lived there at least 2  years of the 5 year period from 2015-2019.   as long as you keep living in Home B, the exclusion would apply since you've live there for the past two years (2018-2019) and continue to do so.

4) if you review the eligibility tests, you couldn't even claim one of you lived in one of the homes and the other spouse lived in the other.  again, assuming you have the documents (drivers license, tax return addresses, etc. to prove it).

I assume you had a gain, otherwise, this is all a moot point? 

[BIC2]

Yes, we have a gain on both.  Your points are all well taken.  I think our facts & circumstances are unique.  We treated the two homes as one.  Mail was delivered to both, sometimes we used one address for mail, sometimes the other.  Each house had a one-car garage and one of us parked in each garage every day.  There was a single irrigation system for both, a single cable TV/Internet connection hard-wired between both, a single backup generator wired to both, a single alarm system, a single security camera system, decks in rear connected for easy movement, etc.  We lived in both every day.

[NCperson]

while you may have lived  in both every day, the IRS says only one can be primary. they make the rules and interpreting them incorrectly is costly. 

what address did you use to register to vote? what address in on your driver's license? what address is on your tax return.  While you may state you used both homes, the facts and circumstances on these documents are not unique ---- only once address or the other can be on those documents. 

Really suggest seeing a tax accountant and would be worth the few dollars it'll cost to do this correctly. 

clearly one of the homes gets the exclusion.