Primary property exception rule on 2 houses?

Question

Dave Foster · Answer

@Rahul Gupta, @Bill Brandt, has a great memory.  The problem you have is that you can only do one primary residence exemption every two years.  Since you just did one you are not eligible for another for 2 years.  And by that time you will be out of the 2/5 window for the air bnb property.

So that ship has sailed.  But there's still an opportunity to sell the air bnb house and do a 1031 exchange.  You will buy more real estate.  But you will indefinitely defer paying tax on all of the profit and depreciation recapture.

Since you have not filed 2023 taxes you could sell the air bnb and take the primary residence exemption right now.  But you would have to pay depreciation recapture.  This would mean that you cannot take any of the other sale tax free or tax deferred.

My best recommendation is to take the best of each - take the primary residence exemption and get the tax free money from the one you just sold.  And do a 1031 exchange on the air bnb and indefinitely defer the tax and depreciation recapture.

Bill B. · Answer

If you plan to have a rental in your new town you could do a tax deferred 1031 exchange of the remaining property to a new rental in your town. If a couple years from now it turned out to be a bad rental you could make it a primary and use the 2 of the last 5 year exemption. 2 caveats. As a 1031 exchange you’d have to own it for at least 5 years, and because it was a rental first you would only get s prorated portion tax free. But it’s still better than 100% taxable.

Bill B. · Answer

I THINK you screwed up. I think you could have sold the 2018 home tax free thsi year and then the 2020 house in 2 years tax free. For some reason I remember there being a 2 year separation requirement for primwry homes. BUT, I could be wrong, ask your tax guy. You also MIGHT be able to file separate tax returns?

sorry I had less of an answer than I thought I did when I started responding. Good luck.
.
ps. Obviously you sell both claim the one with largest gain if forced to choose.

sorry I had less of an answer than I thought I did when I started responding. Good luck. . ps. Obviously you sell both claim the one with largest gain if forced to choose.

Account Closed · Answer

In the United States, there is a tax provision that allows homeowners to exclude a certain amount of capital gains from the sale of their primary residence from taxation. For a single taxpayer, up to $250,000 in capital gains can be excluded from taxation, and for married taxpayers filing jointly, up to $500,000 can be excluded, provided that:

• You owned the property for at least two out of the five years preceding the sale.
• You lived in the property as your primary residence for at least two out of the five years preceding the sale.

Based on your description:

• You purchased your first primary residence in 2018 and lived there until mid-December 2020. Assuming you meet the ownership and residency requirements, the gains from this sale might qualify for the capital gains exclusion.
• You purchased your second primary residence in December 2020. If you lived in this property for at least two years and meet the other criteria, the gains from the sale of this property may also qualify for the capital gains exclusion.

However, for the property that you converted to an Airbnb in December 2020 and are planning to sell now, it may not qualify for the full capital gains exclusion. The portion of the gain attributable to the time it was used as a rental property may not be eligible for the exclusion. You should consult a tax professional to determine how to calculate the taxable portion of the gain for this property.

The tax laws surrounding primary residence exclusions can be complex, and they can change over time, so it's crucial to get advice from a qualified tax professional who can assess your specific situation, consider any recent tax law changes, and provide accurate guidance on how to minimize your tax liability.

Kory Reynolds · Answer

On the face value it is a relatively simple provision - save $500k of capital gains!  But as soon as you start overlapping, converting to business use, there are a lot of complexities.

The exclusion only allows you to claim it once every 2 years.  There are specific circumstances that allow one to claim a partial exclusion if you are sooner than 2 years.  There are also prorations that are made when there is some business and some personal use - a method described in the publication to effectively split the gain between personal residence gain and business gain, the business gain cannot be shielded.  Combine both of these factors, and it becomes that much messier.  Short answer - you will definitely pay some gains on this property when you sell unless your facts and circumstances support deferral through something like a 1031.

Rahul Gupta · Answer

Got it. Thank you

Primary property exception rule on 2 houses?

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