Exclusion of Gain on Sale of House

[boattn]

There is a 2 year period between a previous exclusion of gain. If the client sells next home in the second year, should/must he amend the prior year return to pay the gain on sale of House 1 in order to exclude a bigger gain on sale of House 2? (Both houses they lived in over 5 years.)

[TaxGuyBill]

There is a 2 year period between a previous exclusion of gain

Can you clarify the situation? If there is a two year gap between sales, the client can claim the exclusion on BOTH houses (assuming each meets the criteria, such as using it as their Principal Residence)


If the gap is less than 2 years, you need to find out some more information:

• You said both houses were "lived in" over 5 years. "Lived in" does not matter; it needs to be their "Principal Residence".
• It seems like you said the second house has not always been their "Principal Residence" and was used for other purposes before it became their "Principal Residence". That would mean they have "Nonqualified Use", which means the excluded gain is PRORATED based on total time of ownership versus time it was their Principal Residence (if they owned it before 2009, there is an additional factor to calculate things).
• Why did they move away from the second home? Depending on the reason, they might qualify for an exception to the 2 year rule.

[Lion]

Resided in each house 5 years but less than 2 years since excluding gain? You'll need to look at your dates more closely to make sure House 1 AND House 2 qualify for exclusion of gain. And, the size of House 1 gain WITH interest/penalties to see if it makes sense to amend.

[boattn]

Thank you both, TaxGuyBill and Lion, Specifically, House 1 was their main residence when raising kids. House 2 was a vacation home. Kids are now grown & don't want House 1. Parents have moved to House 2 full time in 2016. Sold House 1 in 2020. Then in 2021an offer was made to them for House 2. They haven't accepted the new offer yet for House 2. They did use "exclusion of gain" in 2020 for House 1. So if they do sell House 2 (before 2022) , they will need to amend their 2020 return, right? Thank you very much, Boattn

[New York Enrolled Agent]

Thank you both, TaxGuyBill and Lion, Specifically, House 1 was their main residence when raising kids. House 2 was a vacation home. Kids are now grown & don't want House 1. Parents have moved to House 2 full time in 2016. Sold House 1 in 2020. Then in 2021an offer was made to them for House 2. They haven't accepted the new offer yet for House 2. They did use "exclusion of gain" in 2020 for House 1. So if they do sell House 2 (before 2022) , they will need to amend their 2020 return, right? Thank you very much, Boattn

Lion - is spot on. What are the actual dates involved? Tough to see the 2 out of 5 years on House 1. Counting days may be in order.

[Lion]

If the gain is larger on House 2 sold less than 2 years after excluding the gain on House 1, and the tax difference would still make sense after paying your fees for amending, then yes you'll want to recommend they amend their earlier return to exclude this current larger gain. Run that scenario in round numbers, so you can provide them with their projected savings. (Or, know now if it makes little difference.)

[TaxGuyBill]

Parents have moved to House 2 full time in 2016. Sold House 1 in 2020.

They did use "exclusion of gain" in 2020 for House 1. So if they do sell House 2 (before 2022) ,

House #1 did NOT meet the 2-out-of-5 year rule to qualify for the exclusion. Did they qualify for special circumstances for the Reduced Maximum Exclusion?

Does the sale of house #2 qualify for special circumstances for the Reduced Maximum Exclusion?

https://www.irs.gov/publications/p523#en_US_2020_publink100073096

[Lion]

Good catch, Bill. I was looking at house #2 and not the timeline. Boattn has bigger problems than when to sell house #2 or whether they can exclude gain from house #2. Boattn, answer Bill's questions re both sales and the "2 out 0f 5 year prior to sale date" requirements for exclusion and any special circumstances.

[New York Enrolled Agent]

House #1 did NOT meet the 2-out-of-5 year rule to qualify for the exclusion. Did they qualify for special circumstances for the Reduced Maximum Exclusion?

Does the sale of house #2 qualify for special circumstances for the Reduced Maximum Exclusion?

https://www.irs.gov/publications/p523#en_US_2020_publink100073096

TGB - agree House 1 is problematical - boat seems to be thinking "calendar years". Don't know if boat will get back soon - 3 months passed between the previous posts.

Assuming you are correct about #1 why any issue with House 2? Maybe I infer something you don't mean.

[TaxGuyBill]

TGB - agree House 1 is problematical - boat seems to be thinking "calendar years". Don't know if boat will get back soon - 3 months passed between the previous posts.

Assuming you are correct about #1 why any issue with House 2? Maybe I infer something you don't mean.

Yeah, I noticed the long delay in response. :-)


For House #2, I am temporarily assuming the exclusion for House #1 was valid (which as I noted above, is questionable). For house #2, the OP is asking about what to do if it is sold in less than 2 years from the last exclusion.

The usual rule of 1-exclusion-every-2-years would not be met, so only one of the houses would qualify for the exclusion. But the special circumstances for the Reduced Maximum Exclusion also applies for the 1-exclusion-every-2-years rule, so if the second house also qualified, he could take both exclusions.