selling 2 investment properties this year, TAXES??

Question

Hello BP community, My wife and I own 4 rental properties in Denver, 3 of them single family homes and one is a duplex. This year we are planning to sell one single family home and possibly another if capital gains don't interfere.

House #1: My primary house 2010-2015.

House #2: Wife's primary house 2010-2014

We got married 2014, she moved in to house #1 with me for 6 months before we bought another house which we moved into 2015.

So both houses we are looking to sell were our individual primary residency for at least 2 of last 5 years. Neither house has both of our names on the title since we both bought them when we were single. So if we sell both houses this year and file taxes jointly then we should be able to profit up to $500k right? And to find the Capital Gain do we simply take the sell price minus the buy price? I've also read you can deduct home improvements and realtor commissions (is that sale commission only?).

Thanks for your help figuring this out. Seems every website I read about this stuff says something different... ugh taxes.

Leland Dunn · Answer

This has been a long painful journey to find a concrete answer and last week I made the mistake of calling the IRS for help. After waiting for 2 hours the first call (they hung up on me without speaking) and another hour on hold a second call I finally spoke to a person regarding capital gains and selling real estate. The lady who answered on the IRS side only gave me 2 sentences and I mentioned the word 'rental' property... she said 'STOP RIGHT THERE. NO. NO. IT'S A RENTAL PROPERTY SO OF COURSE YOU PAY CAPITAL GAINS. END OF STORY'. I was baffled, she had NO idea what she was talking about. When I tried to educate her of the 121 exclusion (2 out of 5 years as primary) she said that wasn't true, and may only be true if you rented a room out and not the whole house. I was so angry I couldn't speak to her any longer... so back to my own research I went. The GOOD NEWS I have talked to multiple CPA's and real estate investors to be 99% sure that we can sell both houses in the same year and not be responsible for capital gains tax.

I wanted to provide an update and closure to the thread. Oh, and I also came across this thread in BP with the exact same scenario:

https://www.biggerpockets.com/forums/51/topics/349...

I can't believe how difficult this was to get a concrete answer on. And the IRS didn't help AT ALL! How are we supposed to follow the rules??? Thanks for listening.

And thank you all for your input, I might have never proceeded with finding the true answer without everyone's optimistic views on this thread. It's going to be a great year for us!

Leland

Steven Hamilton II · Answer

Neither of you have used it in the previous two years. Your situation follows my example perfectly. You will be using it in the same year.

Leland Dunn · Answer

I really appreciate the example above Steven Hamilton II as it fits our situation. However, after further review of the IRS publication 523 I noticed the text in bold below and it clearly states one spouse cannot use the exclusion if the other has in the previous 2 years. Bummed, my CPA looks to be correct.

Married, Divorced, Widowed

Steven Hamilton II · Answer

I I saw the full OP and will say it should be fine here is a similar example:During 2016, married taxpayers Joel and Winnie each sell a residence that each had separately owned and used as a principal residence before their marriage. Each spouse meets the ownership and use tests for his or her respective residence. Neither spouse meets the use requirement for the other spouse’s residence. Joel and Winnie file a joint return for 2016. The gain realized from the sale of Joel’s residence is $200,000. The gain realized from the sale of Winnie’s residence is $300,000. Because the ownership and use requirements are met for each residence by each respective spouse, Joel and Winnie are each eligible to exclude up to $250,000 of gain from the sale of their individual residences. However, Winnie may not use Joel’s unused exclusion to exclude gain in excess of her limitation amount. Joel and Winnie must recognize $50,000 of the gain realized on the sale of Winnie’s residence.

Steven Hamilton II · Answer

You cannot report Did they both reside in each house together or was it separate? How are the houses titled?

Wayne Brooks · Answer

@Steven Hamilton II ?

Leland Dunn · Answer

So my CPA told us that even if we file separately we can only utilize the use and ownership exemption once every 2 years. Which doesn't seem right to me because that means if we weren't married we could separately use the exclusion and not pay any taxes on 250k per house profit... but since we are married we can only sell one house instead of 2. I think I am going to reach out to another CPA, unless there is a tax forum website someone knows I can reach out to other experts??

Leland Dunn · Answer

I did read you can only use it once every 2 years, but wasn't sure if filing separately would change that. I will talk to my CPA and let everyone know the outcome on this post. Thanks for all your input!

Natalie Kolodij · Answer

You can only utilize the Primary exemption once every 2 years

If you guys file jointly you won't be able to utilize it on both houses.

I think you can file separately and each exclude the $250k

Just consider any other effects of filing separately for the year and how your tax impact may increase (depending on if you're a community property state it's almost always a better tax savings to file jointly)

Your CPA should be able to run a quick and dirty estimate both ways.

James Carlson · Answer

Hey @Leland Dunn. I'm not CPA, so take that disclaimer for all it's worth. But I do like research. Here are two sites that basically say that you can file jointly and both exclude up to  $250,000 from capital gains. (Or $500,000 total.)

http://www.nolo.com/legal-encyclopedia/avoid-capit...Scroll down to Marriage and Divorce and then underneath that Separate Residences.

http://journal.firsttuesday.us/the-principal-resid...Scroll down to the heading No Disqualifying Marital Taint

Hope this is helpful. But as the others have said, check with your CPA when you meet with them next week. Cheers!