What is the capital gains liability on selling two homes?

Question

Just under two years ago, I moved to California and bought two homes. I lived in one for about 10 months while renovating the second, then moved into the second while renovating the first, also about 10 months. (I'm rounding the figures to simplify the math.) I've been offered a job outside of the country, and will sell both houses.

Neither house was a primary residence for the requisite 2-year period. My understanding, though, is that if I sell because of a job-related move, I can pro-rate the $250K capital-gains tax exemption by the fraction of 2-years that I lived in each house. In the following calculation, I assume that each house gained $50K in value:

exemption for each house: $250K * 10/24 = $104.17K
total exemption:                        =  208.33K
total capital gains:                    =  100.00K

Does this mean that my exemption completely covers the total capital gains?

Answer 1

I think you're stretching this a bit too far.

1. You can only claim an exclusion for one house every 2 years. See here:

You did not claim any exclusion for the sale of a home that occurred during a 2-year period ending on the date of the sale of the home, the gain from which you now want to exclude.

2. You can only have one main home. See in the same place:

If you own or live in more than one home, the test for determining which one is your main home is a “facts and circumstances” test.

I would say you can claim the work-related move with regards to the home you're currently in, if at all. But the home you moved out of 10 months ago - you cannot claim that you moved out because of the new job, and as such you cannot apply this exception to it.

But I'd say you're risking an audit even if applying the exception to just one home.

In any case, you can only apply the exclusion to the gains from the sale of the house. So if each house generates $50K capital gain, and you want to claim $100K exclusion for one of them - you only really exclude the $50K gain from that house and lose the rest, while the $50K from the other house are your taxable gain.