Expert: Dick Dennis - 6/27/2006

Question
Hi Dick
The purpose of this email is to see if I qualify to avoid being hit with capital gains.  I purchased my first home in 2-1-04 lived in it for 16 months and then rented it out because I found another home soooner than expected that had a 30 day close. Therefore I rented out my first home. I have been currently living in my second home as of 6-05 which is exactly a year. If I am correct to avoid capital gain you are to live in your primary resident home for at least two years to avoid capital gains. Is it possible for me to move back to my first home and live in it for the 8 months to make it two years and then sell it or would I have to live in it for 2 more years. In doing so, if I were to live in it for 2 more years, it would put me owning my first home over 5 years and is there another restication on capital gains if one is to own a home for more than 5 years. Basically are you allowed to break up the years that you live in a home? I love both homes but my first home has gained over $100K in equity were my second is about $15K I would preferred to have to take a hit and sell my second home under two years instead of the first home.
I look forward to here from you soon.
thank you!
-Wendy  

Answer
Under IRC 121, yes, you must live in your residence for two an aggregate time of two years out of five. So, therefore, if you were to move back into your first home for at least eight months, then you would qualify to erase any capital gains up to $250,000 (up to $500,000 if you and your husband filed your taxes jointly) on your first home.

In fact, you could do it again with your second home, make a profit, and not have to declare a taxable gain as of above. Sell it. Then buy another and do it again. And again. And again. Yes, there are people who do that kind of investing.

Check with your tax expert to make sure you do it right.

I do wish you well.

Dick Dennis          dixiedee13@aol.com
www.OldProblemSolver.com