Question

Selling multiple primary residences due to marriage question

Forum|Forum|6 years ago
June 6, 2019
2 replies
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I bought a home - home A - in 8/12 and lived there until 8/14 (2years exactly) then rented for just less than 3 years. I got married in 12/14. My husband bought home B in 4/14 and I moved in 8/14. We sold home B 4/17 and plan to exclude gain (approx 50k). We moved Into home A (where he has never lived until now) in 7/17 and plan to sell in 4/18 at a gain. Can we now exclude the gain of home A since I lived there before marriage enven though we are taking the exclusion the year before.

Hal_Al

Employee

No. You will have to live in home A until at least 7/19 to be able to exclude the gain. The two years (8/12 to 8/14) you previously lived in it don't count any more, because more than 3 years has passed between moving out and moving back in.

In addition, if you do wait to meet the 2 out of 5 year requirement; the portion of the gain (approx 43%) attributable to the rental time will be taxable. This is in addition to the depreciation recapture

O

Opus 17

Employee

You have to live in home A for more than 2 years (731 days) of the 5 years prior to the sale. Assuming you moved in 7/1/17 and will sell on 4/30/18, that is 304 days.  Assuming you moved out 8/31/14, then the number of days between 4/30/13 (5 years back from the sell date) and 8/31/14 is 439.  That gives you 743 days which is more than the 2 years needed for the exclusion.  So your spouse can use her exclusion for home B and you can use your exclusion for home A.

You will need to determine the exact # of days based on your specific move and sell dates.  If my assumptions were too generous, it could very well be that you won't have 731 days until some future time.  And if you don't have 731 days, you can't use the exclusion at all.

However, even if you have 731 days of the past 5 years, there is a provision in the tax law that changes how the exclusion is handled if you move back into the home.  Instead of just accounting for deprecation, you also have to count the rental period as "non-qualified use."  This is unfortunately not well described in IRS publication 523 on home sales.  It's complicated and I think they gave up on trying to explain it.  But Turbotax does include the calculation.

Basically, you will owe recapture on any part of the gain that is due to depreciation during the rental period.  Then you will also owe capital gains tax on the percent of gain due to the rental period (Hal suggests 45% based on your figures).  The gain left over after the depreciation recapture and the non-qualified period would be eligible for exclusion (if you meet the 731 days).

O

Opus 17

Employee

You each get a separate $250,000 exclusion on the home you owned previously. She would use her exclusion only on home B, and then you can use your exclusion only on home A. Then in the future, you would have to wait 2 years from the sale of home A to use what will then be a combined marital exclusion.

However, if the gain on home A will be more than $250,000, you have the option of combining your exclusions for home A and paying the gains tax on home B.

Also, because of the rental period, you will owe some depreciation recapture on home A that is not subject to the exclusion.