capital gains on houses

You can use the $250,000 exclusion of gain every two years. So you should be OK in your scenario, unless the law changes.

Based on the provided facts, Confused would meet the ownership requirement for a Section 121 exclusion on both houses. However, he (she?) provided no information as to whether the primary residence requirement would be met.

Based on the provided facts, Confused would meet the ownership requirement for a Section 121 exclusion on both houses. However, he (she?) provided no information as to whether the primary residence requirement would be met.

========I disagree as to whether the primary residence requirement was met. I say it was for the second house.

However, there is one more thing to note: What was done with the second house in the 2 years it was NOT a residence? Did any non-qualified use (e.g. rental) occur?

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The first house is in town, and the second house is at a nearby lake. Lets say we gradually move into the second house, selling the first one when the move is complete. Neither house is ever rented.

In a practical sense, the primary residence would have changed from the first house to the second house a couple months before the first house is sold. In a legal sense; well, maybe that is part of the advice I am looking for here.

In response to "What was done with the second house in the 2 years it was NOT a residence? Did any non-qualified use (e.g. rental) occur?" I would point out that anything *other than* use as a principal residence is a non-qualified use and any period during which the "other" house is not a principal residence is a period of non-qualifying use. And (I think) that requires the gain to be prorated.

I'm going to assume that there's never been any business/rental use of either property and that the first is your principal residence until you move into the second, which is your principal residence until through the end of our story.

House 1: You meet all the tests for full exclusion of your gain.

House 2: The time from when you purchase it until it becomes your principal residence is "nonqualified use." The portion of the gain attributable to that period is not excludable. See page 16 of Publication 523.

As for when your principal residence changes, it's our old friend "facts and circumstances." From your later post it sounds like this is going to be an incremental move. The best I can offer is to document everything, including nights spent in each property. When you think calling house 2 your principal residence will pass the smell test, make sure to change your voting registration, motor vehicle information, address with third parties such as creditors, etc.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

either property and that the first is your principal residence until you move into the second, which is your principal residence until through the end of our story.

residence is "nonqualified use." The portion of the gain attributable to that period is not excludable. See page 16 of Publication 523.

"facts and circumstances." From your later post it sounds like this is going to be an incremental move. The best I can offer is to document everything, including nights spent in each property. When you think calling house 2 your principal residence will pass the smell test, make sure to change your voting registration, motor vehicle information, address with third parties such as creditors, etc.

Okay, that seems reasonable. The first house is in an area where prices are not going up (in reality I paid $281k for it 20 years ago and it is worth maybe $300k now) while the second house is likely to appreciate well. So I would be better off establishing the second house as my primary residence immediately, and letting the nonqualified overlap period fall on the first house.

I wish I had known this publication existed a few years ago. When I sold a cottage a few years ago I improvised how to figure capital gains. The IRS accepted it (or maybe never looked at it) but I will have to go back and see how closely it corresponds to the correct method.

residence is "nonqualified use." The portion of the gain attributable to that period is not excludable. See page 16 of Publication 523.

Sadly, that is exactly what the law -- IRC Section 121(b)(4)[(5)](C)(i) -- says. Even if your use of a house is 100% personal, if it isn't your PRINCIPAL residence, then that time period is a non-qualified use.

Although some people move in the day after escrow closes, that does not require that everyone do so.