How long must I live in a home to not pay Capital Gains Tax?

August 06, 2021 by Steve Banner, EA, MBA
Capital Gains Tax

Hi Kristi,

You asked: We bought a home in November 2019. In April 2021, we bought a second home in the same neighborhood. We have not moved to the new home yet, as we are doing some projects on the home. My question is when can we move to the new home and not worry about a capital gains tax if we choose to sell or rent the home purchased in November 2019? When can we sell or rent out the home purchased in November 2019?

You raise a very good question as there are many aspects to the tax implications of selling a home that you have lived in as your main residence. The answers to your questions depend on the circumstances of your situation, so I will begin by assuming that you are a member of a married couple who files a joint tax return each year. I will also assume that your reason for selling the 2019 home is not related to health issues or other unforeseen circumstances. If all of the above assumptions are correct, then you and your spouse would be allowed to exclude up to $500,000 of capital gain on the sale of the home purchased in 2019, provided that you both used the home as your main residence for at least two years (730 days) during the last five years. Assuming that you moved into the home shortly after you bought it, this two-year period requirement could not be met until November 2021. Taxpayers can only have one main residence at a time, so if you moved into the 2021 home next week, the clock would be paused on the two-year period for the 2019 home, and a new clock would start for the 2021 home.

However, the tax law also says that the two years of residence do not have to be consecutive, so long as they fall within the five-year window. This means that if you did move to the 2021 home next week and rented out the 2019 home for a couple of years, you could still potentially qualify for the $500,000 capital gains exclusion. But to meet this goal you would have to move back to the 2019 home, use it as your main residence for a few months before selling it, and be able to report having used the home as your main residence for at least 730 days during the previous five years. The $500,000 exclusion would not be affected by the fact that the house had also been used as a rental property.

On the other hand, if you remain in the 2019 home until the two-year threshold is met in November 2021, you could then rent out the home for up to three years before selling it. In this case you could still exclude up to $500,000 in capital gains on the sale because you would have lived in the house as your primary residence for two of the previous five years.

More information about the rules related to the sale of your main residence can be found here on the IRS website.

Sincerely,
Steve Banner, EA, MBA, M.Ed.Admin.

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Steve Banner, EA, MBA
Tax Content Developer

 

Steve Banner began his career in the field of income tax in 1977 and has since gathered business experience in a variety of countries and cultures. In addition to the United States, he has lived and worked for extended periods in Australia, Saudi Arabia, Canada, and Sweden. Along the way he studied Adult Education and earned a Bachelor of Education, Master of Educational Administration, and MBA. He joined TaxAudit in 2016, where he is a Tax Content Developer.


 

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