Hello.  My wife and I want to cash out of our two homes and move due
to a relocation by her employer.  We own a rental house, which was my
primary residence for two years...1.75 years of which I was single,
the last 1/4 I was married.  Then I rented that house and my wife and
I bought a new house.  We want to sell BOTH houses a year from now, at
which point we'll have lived in our new primary residence for two
years and I'll have rented my first primary residence for just over a
year.  I believe I fullfill the rule about living in the rental
property and our current primary residence now for at least two years.
 But if we sell both houses at once, do I still have to pay captial
gains on the rental (my first house), or else how does it factor in
that my wife's company is going to relocate her?  There are multiple
issues here and I'm not sure how much I'm going to wind up owing, if
anything, on the two properties.  Both properties have appreicated
around $200k each ($400k total).  What is my tax burden?  Thanks.

You are only allowed to sell a principal residence once every two
years to get the capital gains exclusion.  Therefore, if you are going
to sell both homes in the same year, you are going to have to pay
capital gains on one of them.  The good news is that since you have
lived in the rental property for at least two of the last five years,
and you have lived in the new house for at least two of the last five
years, you can exclude the house that has the higher capital gain (up
to $500,000).

Note that you will have to recognize a gain on depreciation claimed
after May 6, 1997 on the rental property, so that may determine that
the rental is the better choice for the capital gain exclusion if they
have otherwise appreciated about the same amount.  The effect of the
depreciation recapture is to increase the capital gain associated with
the rental property.

To avoid the capital gain altogether, you would have to sell the
rental, wait two years, and then sell the other house.

"Making Home Sale Capital Gains Disappear" by Roy Lewis, The Motley
Fool http://www.fool.com/taxes/2000/taxes000428.htm

Sincerely,

Wonko

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Request for Answer Clarification by dcguy-ga on 05 May 2005 08:25 PDT

Thanks for your answer.  I have one thing I'd like you to clarify.  If
I sell the rental property now, then sell my primary residence a year
afterwards, do I get to prorate the captial gain on the rental, or is
it an all or nothing deal if I sell both within two years of each
other?  I'm hoping you'll say I will only owe 50% of the captial gain
if there is just a 1 year difference between when I sell both houses. 
Thanks.

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Clarification of Answer by wonko-ga on 05 May 2005 08:49 PDT

According to my understanding of the tax code, it is an all or nothing
deal.  Either you wait two years between sales, or you cannot exclude
the capital gains on the second sale.

Sincerely,

Wonko

I disagree. At the closing for each sale you will be asked to fill out
an IRS form that determines whether or not you have a tax liability.
The important question is "Has the property been your primary
residence for at least two of the last five years". In other words, if
you live in a house for two years then rent it for 2 years and 11
months, you can sell it with no liability (up to 500k). Nothing
prevents you from selling a past residence and a current one in the
same year. The question isn't even asked.

I found the information I was looking for in IRS Publication 523.
http://www.irs.gov/publications/p523/ar02.html#d0e3011  It talks about
the "Reduced Maximum Exclusion", which allows prorating the amount of
your maximum exclusion if you are forced to sell your homes within two
years of each other due to job relocation or health issues.  In my
case it will be due to job relocation.  Look at Worksheet #3.  I have
not seen ANY evidence that suggests you can sell two houses at the
same time and exclude the captial gains on BOTH.  Why do you say the
question isn't even asked?

The IRS publication states: "You cannot exclude gain on the sale of
your home if, during the 2-year period ending on the date of the sale,
you sold another home at a gain and excluded all or part of that gain.
If you cannot exclude the gain, you must include it in your income. " 
(except if you qualify for the Reduced Maximum Exclusion).