How to show qualification for partial exclusion of capital gain

[funes]

I had originally thought I would qualify for full exclusion because I will have stayed in my current property for 2 years and 1 day as primary home before closing. However, my prior property was sold AFTER I bought the current one I reside in. Because I excluded gains from that one, because my new sale will happen before the 2 year mark of the prior sale, I qualify based on the 2-of-5 rule but I don't qualify based on the look-back rule. Is this right? However, we are moving to a new state because of new jobs. How does one show this to the IRB? Will I need to submit my contract at the current and new job? And is there a time frame allowed? For example, if I close on my property in late May but my contract does not start until July, would that still work? I could not find specific answers to these elements. I was not expecting to not qualify for full exclusion because I incorrectly thought all it took was living here for 2+ years. However, I will have lived here for ~92% of the period, so my exclusion would still be > 450K. I will most certainly not have more capital gains than that (calculating ~150K), so I will not be taxed on that. Did I get this right? Thanks for all the help!

[JulieS]

No, you are only allowed to take the exclusion once in a two year period. 

Here is an excerpt from IRS Publication 523:

"If you didn't sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn't take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period."

The exception for work related moves is an exception to the period of residency and ownership, not to the look-back period. Click here for more information. 

[funes]

Oh boy, does this mean I will be taxed on capital gains on this property I'm selling in May 2023 fully because I sold my prior one in July 2021? Even if I lived here for 2 years and I'm moving out of state for a new job?

I did go through the IRS exercise that @JulieS posted prior to posting this and I did not interpret the moving out of state for a new job as being only a qualifier for the residency time criterion. Can someone point to where it says that the look-back disqualification stops me from applying a partial exclusion if I am moving for a new job?

[JulieS]

I tested this in TurboTax and I was given a partial exclusion, so it is worth working through it to see if you qualify. 

To find the section to report the Sale of Home, you can use the Search Box to search for Sale of Home and click Jump to.

If you don't see the Jump to link:

1. Select Federal on the left side menu.
2. Select Income and Expenses toward upper left.
3. Expand/ scroll down the list and find the section called, Less Common Income.
4. Expand the section and find Sale of Home. 
5. Click Start to the right.

Work through the questions carefully and make sure you understand the questions completely before answering.

As for submitting proof with your return, you are not required to do that and if you try, it is likely to cause processing delays. Keep your documents regarding the purchase and sale of this home until at least April 18, 2026. 

[funes]

Thank you @JulieS ! This will affect my 2023 taxes, so I am not sure I can try it on Turbotax myself. I am just trying to make a smart decision now about my closing date for the home I currently own and will be living in for 2 years, considering I closed on another home in July 30, 2021 and excluded capital gain taxes that year. Is there a way to simulate a future tax cycle in TurboTax? 

[JulieS]

If you can wait until August 1, 2023 to close, there would be no doubt you could use the exclusion. 

If you want to simulate this in TurboTax, you can enter it and change the dates to one year earlier. If you do that, be sure to delete the extra information before filing.