USA long term capital gains on real estate?

[dontknowishaboutaccountin]

We moved to Florida on 11/17/20 into a new home but did not sell our previous home until 3/11/21. We lived in our previous home for 22 years and did not pay capital gains on the profit of its sale, which could possibly be nothing since improvements can be deducted and over 22 years, there were a lot of improvements. We sold for only about 86k in profit after realtor fees and not including any improvements. Yeah, I know, terrible investment but it was home. We purchased our current home for 448K and can probably sell for 700-725k now. We were just made aware that we will need to relocate to Tennessee for work and will need to sell within the next couple of months.

So there's the backstory, here's my question. I know that we would qualify for an exclusion of 500k of long term capital gains for married couples after 11/17/22, but since it hasn't been 2 years from the sale of our previous home and we should have no problem getting a safe harbour designation from the IRS what is the tax implications for the sale of our current home? We have used this home as a primary residence the whole time and owned the whole time so we satisfy the 2 criteria for full exclusion, I just don't know how it all works when you have to consider safe harbour or the previous sale. Does a partial exclusion reduce the deduction allowed or do you have to prorate the profit realized and pay taxes on the difference?

 

[BIG E]

You are talking about 2 different sales of primary residences with differing rules pertaining to each.
Sale of 1st house - Since you claim you used the residence for the required minimum 2-year period out of 5 years as a primary residence, you're entitled to the (assuming married, filing jointly) up to $ 500,000 Section 121 exclusion of gain.

Sale of 2nd house - You need to wait for the 2 year period to be completed before you can consider the exclusion, unless due to
"unforeseen circumstances" that you can document. Then there is a partial exclusion based on the time period held vs the 2 year period.
See IRS Publication 523, P. 6-7 https://www.irs.gov/pub/irs-pdf/p523.pdf

 

[dontknowishaboutaccountin]

After 11/17/22 we will have met the 2 year primary ownership and resided in criteria for our current home but it will not be 2 years from the sale of our previous home. If I am understanding you correctly, one has nothing to do with the other and after 11/17/22, we are good to sell our current home and can utilize full exclusion so long as its under 250K/500K after improvement costs/realtor fees?

 

[BIG E]

What I was expressing is that you can only claim the benefit of the exclusion only after a 2-year period from claiming it the first time.

 

[dontknowishaboutaccountin]

What I was expressing is that you can only claim the benefit of the exclusion only after a 2-year period from claiming it the first time.

Ok, I understand and that is what I originally thought. Since we have to move for work and should not have a problem getting safe harbour from the IRS, would we qualify for partial exclusion and if so, does it reduce the amount you can claim i.e. a reduction of the 500K limit, or prorate the actual amount of gains realized after the sale and then we would have to pay the tax on the difference? Reason for this question is we should not be anywhere close to the 500k limit and if this is the case we should have zero tax liability, but if the actual gains realized is prorated we will owe tax. Sorry if this seems redundant to you but I really appreciate your expertise and your input.

 

[BIG E]

You should be able to do that. The exact calculation should be illustrated in the IRS Publication 523 from the link provided in my first response.