Selling Rental with 2 Out of 5 Year Rule

[Alex Boulger]

Hello everyone,

I own two properties in Tennessee. The first property is a condo, and my wife and I own 90% of it, and my brother-in-law owns 10%. The condo was purchased March 2019. We lived there until September 2021. In September 2021, my wife and I moved overseas and, we are still living abroad. My brother-in-law has remained living in the condo the entire time (not sure if this is important). I need to know if we would receive a tax break if we sold the condo before the end of this year. Our intention would be to roll the money from that sale directly into our second-home property. I recently discovered the 2 out of 5 year rule where you must live in the property for two out of the last five years in order to get a tax break. I would like to speak to a tax professional regarding this situation in Tennessee. Our primary address according to our 2021 tax return is the property in question (even though we technically moved in September 2021). Has anyone done this before?

Thanks!

-Alex

[Drago Stanimirovic]

Hi Alex,

You're correct about the 2 out of 5 year rule. Since you and your wife lived in the condo until September 2021, you can sell it and potentially exclude up to $500,000 in capital gains (as a couple) if sold before September 2024. Your brother-in-law’s 10% ownership won’t affect your ability to claim this exclusion on your portion.

Unfortunately, the option to roll proceeds into another property (like a 1031 exchange) only applies to investment properties, not personal residences.

You’re likely eligible for the exclusion, but I recommend confirming with a Tennessee tax professional for any specific state tax issues and to verify your status with overseas residency.

Let me know if you need more guidance on this or related financing!

Best,

Drago