How is Real Estate Tax upon Sale of One of the Properties calculated when you own two homes that you live in?

Question: My wife and own two homes. We own a condo in the city and also own a house out in the country. Both of them are residences—we normally stay in the city during the work week, and at the country home on weekends and over holidays. Our oldest child is a sophomore in high school and we anticipate having to sell one of the homes to help pay for college. Since both homes are residences, do we have our choice as to which one we would exclude from paying taxes on upon sale? Or since there are two of us and two homes, could be theoretically exclude both?

Response: The fact that there are two of you may allow you to exclude double the profit as a single person, but it does not allow you to exclude two homes. First, bear in mind that some states charge a “transfer fee” or other tax upon sale of real property—since you don’t mention what state you’re from, contact your state department of revenue or taxation to see whether your state does.

Second, just to clarify—normally, when people speak of being taxed on the sale of real estate, or excluding real estate transactions from taxation, what they’re referring to is paying income tax on any profit from the sale. Profit is income, and would normally be taxed as income; the corollary is that if you don’t make a profit (for example, if in a declining market, you sell a home for less than you paid for it), there’s no tax.

The IRS allows you to exclude much of the profit from the sale of your primary residence from your income tax. A single filer does not need to report or pay taxes on the first $250,000 of profit; a married couple filing jointly can exclude the first $500,000. If you make more profit than that, you can still exclude up to $250,000 (single filer) or $500,000 (joint filer) and just pay taxes on the amount over that.

To be excluded, the property must pass the ownership and use tests:

• Ownership test: you’ve owned the home for at least two years
• Use test: you use the home as your main home for at least two years recently

Your “main home” is where you live in most of the time. It’s basically where you spend 50.1% or more of your time. From what you said above, it sounds like the city condo (4 in 7 or 5 in 7 days, most weeks) would qualify as the main home, which means that’s the one you could sell while excluding profit from income taxes.

Fortunately, if your daughter is a sophomore in highs school and you’re looking to sell for college, you have time to change that around if you want: spend the next two years living more often than not at the country home and you could exclude the profits from its sale instead, if that would be more advantageous.

Answered by Steven Zweig

Additional Resource:

• Real Estate Tax Tips – IRS.gov
• Example of a state real estate transfer fee

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