Primary residence capital gain exclusion

[Geoff Shaw]

My wife and I are debating selling our primary residence and down sizing into our rental property. If we use the capital gain exclusion on selling our primary residence, ($150k gain currently) are we able to utilize that tax exclusion again in the future if we live in the rental for 2 years and have owned it for more than 5 years?

[Michael Plaks]

@Geoff Shaw

I want to make sure you fully understood the answer from @Dave Foster

You can buy a new residence every 2 years and reuse the full exclusion, up to $500k, each and every time. Some people do that, as a matter of fact.

Your scenario has a complication: you're moving into a rental you already own. You can still use an exclusion after 2 years of living there, but it will be a partial exclusion, not a full one. For example, if you owned this rental for 4 years already and then move into it yourselves for two more years, you can only exclude 1/3 of your gain (two out of six years) and will still owe taxes on 2/3 of the gain. You will also owe tax on 100% of depreciation recapture for the 4 years of renting.