Sold rental, was personal residence and sold the current personal residence in 2015

[nwtaxlady]

Clients had his and her houses when they got married. So they moved into her house and started renting his in 10/01/12 and has been rented since. At the time the FMV was less than purchase price so put the FMV on depreciation = Land=38,100 house=63,500 Total purchase price was $127,500 FMV was only $101,600.

So in 2105 they sell her house which they both have been living in all this time which qualifies for the personal residence exclusion.

Also sold the other house that has been rented out since 10/1/12. Sold on 5/29/15. And the real estate market is booming here so it was time to sell.

My question is.... can they also take the personal residence exclusion on this one^^ and just recapture the depreciation taken? Or are they stuck with the whole gain? They did receive a 1099-S.

My first thought is, can they have 2 personal residence exclusions in 1 year, or is it limited to every 2 years?

[New York Enrolled Agent]

.

My first thought is, can they have 2 personal residence exclusions in 1 year, or is it limited to every 2 years?

a snip from IRC §121

(3) 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.

[Burke]

Was his house still in his name, and her house still in hers at the time of sale? If so, what would happen if they filed MFS?

[TaxGuyBill]

I'm leaning towards YES, they can exclude both houses.

http://www.taxprotalk.com/forums/viewtopic.php?f=8&t=1538

As a side note, you are using the cost basis (purchase price) to calculate the gain, right? Don't use the FMV to calculate the gain.

[Burke]

So am I, as long as each TP still owned the home(s) in question in their individual names. 5 yrs from date of sale of rental house would be 5/29/10. So assuming it was his principal residence prior to 10/1/12, he would meet the 2-of-5 rule. Whether or not they would have to file separately to be able to take advantage of this is another question. And of course, he has to deal with the depreciation taken. Key point in IRC 121 is "sale or exchange by the taxpayer." Each spouse is an individual taxpayer.

[nwtaxlady]

I have more info on the ownership of the houses

His house that they rented and sold was in his name & his ex-wife's name on the property taxes. But on the sellers closing papers it is him and his new wife listed as sellers. And on her house that she had and he moved in with her. They had refinanced and so it has both names on it.
Now what?

[Burke]

What matters is what is on the deed, not the tax bill or the settlement statement, although you would think they would have it right. Did he and his ex-wife still own the rental house? I would think it would have been changed in the case of a divorce, or he would have had to give her half the proceeds from the sale. I see plenty of errors on settlement statements. Like in the case of estates and beneficiaries, etc. Just because the current wife's name was on the HUD-1 doesn't mean she owned any of it. Again, on the current wife's house, was his name put on the deed? If so, then he is a joint-owner and would not be able to use two 121 exclusions in the same year. A title search should have covered all this. Ask them for the paperwork.

[nwtaxlady]

More information about this

I asked more questions and this is what I found out. Her house, his name was added to the deed when they refinanced early 2015 and had no intentions of selling this house at that time. Later in the year a house came up for sale that they just loved and made it happen. I asked her what she paid for her house and she said back in 2006 she paid $186,000 and they sold it for $187,500. After you take out realtor fees etc, it would be a loss. So I am thinking don't even put this one on Sch D and just go with the sale of his house which was issued a 1099-S and just recapture the depreciation.