Hi Ed and company!

We receive financial guidance from your friends Jim and Chris over at Jim Saulnier & Associates. All the podcasts, including theirs, talk about Ed Slott as the guru of taxes so of course I came here. We have a tricky question regarding the exceptions for divorced couples regarding capital gains taxes on the sale of two (primary) homes within two years that we hope you can help with.

Here’s the situation:

When Joe got divorced he and his ex did the “co-parenting” nesting house thing. The kids stayed in the marital home post-divorce, and the adults swapped in and out of it every other week. Joe is on the title of the marital home, and also purchased a second home nearby to stay at on the weeks he wasn’t with the kids. In the past five years, Joe did the nesting thing with the marital home for at least two years but stopped doing that in 2019 when the kids were adults, and has since been solely in his other home since then as the ex-wife moved back into the marital home. Now they are selling the marital home, and Joe also is selling his side/now primary home which he only purchased where it was to be near his children. Essentially, he had two primary homes due to the nesting situation. We just learned you can’t sell two homes within two years and avoid capital gains. They don’t explain this to you when they tell you about nesting!

Chris gave us a bit of hope with this:

“Disclaimer: I am not a tax professional. The following is just my opinion. You should confirm this with a true tax pro.

My reading of Pub 523 leads me to believe that he may actually be able to claim the exclusion on both as long as he has met the 24 months in past 5 years residency test. This is due to the “Exceptions to the Eligibility Test” section where they call out homes owned by now divorced spouses. If house was owned prior to divorce, then is sold post-divorce, an exception is granted against the other eligibility requirements, EXCEPT the residency requirement (any 24 months residing there in last 5 years). Without the divorced exception the one exclusion in 2 years rule would bar claiming both, but with this exception is appears to ignore all eligibility tests (including the 2 year look-back “Eligibility Step 4”) except the Eligibility Step 3 -Residence test. My reading of your email indicates he meets the residence test.

As far as qualifying for the exclusion post divorce, this article supports this: https://www.cpapracticeadvisor.com/tax-compliance/news/11326494/divorce-and-the-section-121-personal-residence-exclusion

While I haven’t found an example with identical facts to yours, I think a tax professional may be able to add clarity to this and confirm both homes could qualify for the exclusion (only half of the married exclusion on the home with his ex).”

We’ve looked at the IRS guidance but can’t figure out how to proceed. Can we avoid capital gains on both? If not, is there a formula to reduce gains owed on one? Lastly, how does Joe report this on his 2021 taxes?

Sincerely,
Confused Former Nester and current partner