Property Sale Capital Gain Exemption

[nolanm]

Couple MFJ owns 2 homes and live in both at different times of the year. The rule of 2 out of last 5 years applies to both homes. 

In 2020 sell 1 home, capital gain of 300K. Not entered on taxes as gain is exempt and no 1099-S was generated.

In 2021 they sell the 2 nd home, capital gain of $150k, no 1099-S.

Can I exclude the 2nd home sale in 2021 taxes as together the total gains are less than $500k, and no other sales have occurred in the past 5 years? Or does the first gain of $300k in 2020 where exemption was taken exclude them from taking a 2nd tax-free gain in 2021?

Thanks for any advise

Nolan 

[rbynaker]

Section 1212(b)(3):

https://www.law.cornell.edu/uscode/text/26/121

Application to only 1 sale or exchange every 2 years

Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied.

[GodFather]

Why would the sale of the first home not be included on their tax return?  Or was it entered and the exclusion was taken?

If it was entered and the exclusion was taken, then as rbynaker mentions, 2 year rule. 

[Norman2001]

The sale does not have to be reported if all of the gain is excluded and no 1099-S is received

[Norman2001]

There are 3 rules.  One of them is:

You may take the exclusion, whether maximum or partial, only on the sale of a home that is your principal residence, meaning your main home. An individual has only one main home at a time. 

The homes are not treated equally for the exclusion, because only one is their principal residence. 

[nolanm]

Thank you all for the feedback.

My reading of this is that "1 sale within 2 years rule" overrides all else, and we need to report gain on house 2. Even though house 1 sale was not reported as it did not need to be reported. 

Further wrinkle. House 2 joint owned by clients adult daughter (separate taxpayer) who lived in the house in aggregate for 2 years while completing her studies. 

Thoughts on using daughters exclusion for 50% or whole gain for sale of house 2? 

Thanks Nolan

[sjrcpa]

If daughter met the 2 out of 5 year ownership and occupancy rules she can claim the exclusion on her portion of the gain.

[TaxGuyBill]

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@nolanm wrote:

Couple MFJ owns 2 homes and live in both at different times of the year. The rule of 2 out of last 5 years applies to both homes. 

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Are you saying it was something like they claimed that each year they alternate - 6 months of Principal Residence at one home, and 6 months or Principal Residence at the second home? 

If so, it seems like you have "Nonqualified Use", so neither home would qualify for the full exclusion (in which case the prior tax return is wrong because part of the sale is taxable).

In regards to the second home, why did they move?  There are some circumstances that would qualify to tax the exclusion again.  But like the first home, there would also be Nonqualified Use that will reduce the excludable amount.

[nolanm]

Good point TaxGuyBill

I don't see any circumstances that make the 2nd sale non-taxable due to the 2 year rule. 

Will verify with TP re time spent in each home. 

Looks like 50% of net gain on house 2 is taxable.

Thanks Nolan

[qbteachmt]

If you dive into the 2-year rule, you see examples of not reporting for exclusion one or the other sale, to maximize the exclusion. Having to report sale 2 as taxable is the better option.

[TaxGuyBill · Accepted solution]

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@qbteachmt wrote:

. Having to report sale 2 as taxable is the better option.

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No necessarily.  As I mentioned before, it seems like there is "Nonqualified Use", which means the exclusion is prorated.  Hypothetically, it is possible that house #1 has significantly more Nonqualified Use resulting less exclusion than house #2.