Can I use exemption for capital gains when selling two homes in less than two years?

[jsbr5000]

I sold my home I lived at in September 2020. I didn’t pay capital gains tax on this home because it was my primary residence since 2007. I built another home and moved in May 2020. I have been here a little over two years as my primary residence. I plan on listing the home for sale. Will I have to pay property gains tax on this home? The sale of my other home netted a profit of $20,000 and this home should get get $60,000. I understand that I can avoid the capital gains tax if I live at a primary residence for two years, but I’m not sure if I can claim two homes within that time that was a primary residence. I’m also single and can claim the $250,000 capital gains exclusion. Also, I’m wondering if it would be best to wait until September to sell since that will be two years for this home. Thank you.

[Carl]

The rule is, the home must have been your primary residence for at least 730 days of the last 1826 days you owned it. You can only claim the exemption after two years have passed since you sold the last home that qualified for the exemption, and you actually took that exemption.

So if you closed in sept of 2020, I would suggest you wait until Sept of 2022 for the next one. Keep in mind the IS counts days. So if this home was your primary residence for 729 days, you don't qualify for the exemption. Also, the date that prior home stopped being your primary residence and the date the new home started being your primary residence can't overlap, and they can't be the same date.

[Opus 17]

You can't use the exclusion more than once every two years, unless the reason you are selling the second home is due to one of the types of unexpected financial hardships as described here, under "do I qualify for a partial exclusion."

https://www.irs.gov/forms-pubs/about-publication-523

Assuming you don't qualify for a partial exclusion, this is how it works.

You can only have one main home at a time.  If you moved into house #2 in May 2020, then house #1 stopped being your main home at that time.

You qualify now for the exclusion on house #2, since you have owned it for at least 2 years and lived in it at least 2 years as your main home.  However, if you used the exclusion on house #1 that you sold in September 2020, you can't use the exclusion again until September 2022 (2 years and 1 day after the previous closing date, to be exact.)

If you want to sell house #2 before September, you have two options. 

1. Don't claim the exclusion, and pay the capital gains tax.

2. File an amended 2020 return to pay the capital gains tax on the sale of house #1.  By not claiming the exclusion on house #1, you can claim the exclusion on house #2 at any time after May 2022.  (Because the tax on 20K of gains is less than the tax on 60K of gains.)

If you wait until September to sell house #2, you can claim the exclusion on house #2 without changing the exclusion on house #1. 

If you DO qualify for a partial exclusion due to unforeseen hardship, it will be based on the shortest of three time periods

1. how long you owned house #2
2. how long you lived in house #2 as your main home
3. how long since you last used the exclusion

In your case, (c) is the shortest, about 21 months at this point, so you would qualify for a maximum exclusion of $250,000 x 21/24ths.  That would still more than cover your $60K of gains. 

[jsbr5000]

Thank you. Let's say the closing date my previous home was September 15th. Does this home need to have the closing date as September 15th? or can it be any day in September?.

[Opus 17]

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@jsbr5000 wrote:

Thank you. Let's say the closing date my previous home was September 15th. Does this home need to have the closing date as September 15th? or can it be any day in September?.

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September 16, or later.

Eligibility Step 4—Look-Back

Determine whether you meet the look-back requirement.

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.

[jsbr5000]

Thank you so much for the detailed explanation and my options. I have been having a hard time getting a straight answer. Much appreciated!

[jsbr5000]

I just read up on the exclusion part of the article. My fiance and I are separating and that is the reason the home is being listed. Since she is not a spouse, can this still be considered an unforeseeable event? If I can use that, that would be the best way to go. Thank you.

[Opus 17]

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@jsbr5000 wrote:

I just read up on the exclusion part of the article. My fiance and I are separating and that is the reason the home is being listed. Since she is not a spouse, can this still be considered an unforeseeable event? If I can use that, that would be the best way to go. Thank you.

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There are several "safe harbor" situations, which are called that because if you meet the conditions, your claim won't be questioned.  (Your situation does not fit any of the safe harbors because you aren't married.) There is also the general "other facts and circumstances" condition.  You would have to show that the separation was not something that you would reasonably anticipate when you bought the home, and the separation caused a significant financial difficulty in remaining in that home, forcing you to sell early. 

For example, if you were not dating when you bought the home, then you could afford the house on your own, and your partner moving out is not really causing you a hardship.  On the other hand, if you moved in together and your partner always paid half the mortgage and you can't afford it on your own, then the separation is causing a hardship that is forcing you to sell, even if your partner is not a co-owner.  On the other-other hand, if you next buy a more expensive home on your own, you undercut the argument that you were forced to sell early due to an unforeseeable hardship.  If you are selling for preference, rather than financial hardship, you don't qualify, and should just wait the full 2 years or pay the tax. 

It depends on the facts and circumstances of your particular case, and only you can make that judgement call.