Tax implications: Selling two properties in same tax year - capital gains question

Thanks for the info! We typically only do 1-2 properties per year, and we usually hold them for at least a year before selling. We also make significant renovations. Would that help us qualify as investors rather than dealers? Also, if we use the proceeds from the primary residence sale to buy another primary residence, does that change anything tax-wise?

The pattern of 1-2 properties per year with significant renovations and holding periods of at least a year does strengthen your case as an investor rather than a dealer. The IRS looks at multiple factors, but your situation seems to align more with investment activity than a dealer business model. Regarding using your primary residence proceeds to buy another home - that actually doesn't matter for tax purposes anymore. The old "rollover" rule was eliminated back in 1997 when the current exclusion system was created. Now you simply get the $500K exclusion (married filing jointly) if you meet the ownership and use tests, regardless of whether you buy another home with the proceeds. This gives you complete flexibility with those funds without tax consequences, assuming you stay within your exclusion amount.

How accurate was it compared to what an accountant would tell you? I'm always skeptical of tax software when it comes to real estate because there are so many weird rules.

Does it help figure out if you're considered a dealer vs investor? That's always been a gray area that worries me. I've had a tax guy tell me one thing and then I read something completely different online.

It was surprisingly accurate - I actually had my accountant review the report it generated, and he said it identified everything correctly. The main difference was that the tool found some improvement expenses I had forgotten about that my accountant wouldn't have known to ask about. For the dealer vs investor question, it absolutely helps with that determination. It runs through all the factors the IRS considers (number of properties, holding periods, marketing activities, improvements made, etc.) and gives you a detailed analysis of where you likely fall on that spectrum. In my case, it confirmed I was definitely in the investor category based on my specific circumstances, and explained exactly why. Much more detailed than the general advice you typically find online.

Wait, how does this actually work? The IRS never answers their phones - I tried calling for weeks last year.

Sounds like a scam honestly. There's no way to just magically get through to the IRS when millions of people can't get anyone to pick up.

It works by basically holding your place in line with the IRS automatically. Instead of you staying on hold for hours, the service navigates the IRS phone system and calls you back when an actual agent picks up. That's why I was skeptical at first too. It's definitely not a scam - I was connected to a real IRS agent who had full access to my tax records and answered my specific questions about property sales. The system just eliminates the need for you to physically wait on hold. I was doubtful too, but it legitimately works and saved me from wasting an entire day on the phone. They have that video demo that shows exactly how the process works if you're curious.

I hadn't even thought about state taxes! We're in Florida so there's no state income tax, but that's really helpful to point out for others. Are there any other gotchas you discovered during your multiple property sales?

Since you're in Florida, you definitely lucked out on the state tax front! The biggest other gotcha I ran into was documentation for improvements. The IRS wanted receipts for all the major renovations I did to prove they should be added to my cost basis. I had most but not all of them, which was a headache. Another thing to watch for is depreciation recapture if you ever rented out that primary residence. Even if the gain is excluded under the $500k rule, you still have to recapture any depreciation you claimed during rental periods at a 25% tax rate. That surprised me since I had rented my primary home for a year before selling it.

It depends on your other income and what tax bracket you'd be in each year. If selling both in the same year pushes you into a higher capital gains rate (like from 15% to 20%), then splitting them might make sense. Also consider if you have any capital losses to offset the gains.

This is incredibly helpful information! I hadn't even considered that we might qualify for the 0% capital gains rate. With our only taxable income being the $33K from the investment property, we should definitely be well under that $83,350 threshold you mentioned. That would be amazing if the entire gain could be tax-free. Just to make sure I understand correctly - the veterans benefits don't count toward that income threshold at all, right? And would any standard deduction further reduce our taxable income below the $33K, potentially making us even more solidly in that 0% bracket? This really changes how I'm thinking about the timing of these sales. Thank you for breaking this down so clearly!

Exactly right! Veterans benefits are completely excluded from taxable income, so they won't count toward that $83,350 threshold at all. And yes, you'll also get the standard deduction ($27,700 for married filing jointly in 2024), which further reduces your taxable income. So if your only taxable income is the $33K capital gain, your actual taxable income after the standard deduction would be around $5,300 ($33K - $27,700). This puts you well within the 0% capital gains bracket, meaning that investment property gain could indeed be completely tax-free! This is a great example of why tax planning matters. Your unique situation with non-taxable veterans benefits combined with the current capital gains structure creates a real opportunity here. Just make sure to document all your improvement expenses on that investment property to keep that gain as low as possible, even though it might not matter tax-wise in your case.

This is exactly the kind of detailed advice I was hoping to find! The timing aspect about closing dates is something I hadn't fully considered - we're looking at late November for the primary residence sale, so there shouldn't be any risk of it slipping into next year. It's honestly pretty incredible that we might end up with zero federal tax liability on both properties. Between the primary residence exclusion and potentially qualifying for the 0% capital gains rate on the investment property, this could work out much better than I initially thought. I'm definitely going to start organizing all our documentation now rather than waiting until tax season. Having everything ready early will probably save us a lot of stress later, especially with multiple property sales to track. Thanks for pointing out the closing date detail - that's the kind of thing that could really trip someone up if they're not paying attention to it!

This is a really important point about the dealer vs investor classification when both spouses are involved in real estate activities. I've seen cases where people thought they were safe because they weren't doing "that many" deals, but the IRS looked at the totality of circumstances and classified them as dealers anyway. One thing that might help strengthen your investor case is if you can show that the real estate activities are truly investment-focused rather than a primary business operation. For example, if your wife has other employment or business activities beyond just the real estate, or if you can demonstrate that you're holding properties for appreciation rather than quick turnaround, that supports investor treatment. The documentation suggestion is spot-on - keeping contemporaneous records of your investment intent when you purchase each property can be crucial if the IRS ever questions your classification. Something as simple as written notes about your plans to hold for rental income or long-term appreciation can make a big difference. Given that you might qualify for 0% capital gains as an investor versus ordinary income tax plus self-employment tax as a dealer, this classification could literally save you thousands of dollars. Definitely worth getting professional guidance on this specific issue.