Hamill: How two lot sales can still get the $500,000 tax exclusion

Question: I have a home that sits on two acres of land, but there are two separate deeds for the lots. When I purchased the home, there were one-acre lots available for development, and I purchased two adjacent lots. I built a home on one lot and have used the other lot as part of my residence. For example, when the kids were young, we used the one lot for T-ball and soccer practices. Since then, I have installed a fire pit and tables and chairs, and we often spend time on that part of the property. I now plan to sell my house and hope to find someone who wants the adjacent lot as part of the deal. But with the current state of the housing market, I think it may be more likely that I will have two separate sales. The total gain is going to be around $400,000. I’m not sure how much of that relates to each property. But my question is whether I must sell both properties to the same buyer to get the full $500,000 tax exclusion for married people, or if that full amount can still be available if there are two sales.

Hamill: You should be able to get the full $500,000 exclusion without regard to the structure of the sale. But two sales do complicate how the rules are applied.

The tax law allows you to exclude as much as $500,000 of gain if you sell property that qualified as your principal residence for two of the five years before sale.

This exclusion is generally available only once every two years. There are some exceptions, but let’s deal with the once every two years rule.

There are a few specific rules that apply to your situation. First, both properties must have been used as your principal residence.

Your description of how you used the properties seems to satisfy this requirement, but understand that it might be an issue.

Second, the land must be adjacent to the deeded lot on which the residence sits. You meet this requirement.

Third, the two sales, if to a different buyer, must be within two years of one another. The sale of the first lot starts the clock running.

The simple answer to your question is that then a sale to a single buyer will satisfy the requirements.

A sale to two buyers can also satisfy the requirements, provided the two sales occur within a two-year period.

If there are two buyers, the order of the sales is also important. If the lot with the house sells first, you can claim the gain exclusion for the year of that sale.

If the vacant lot sells first, and the lot with the house is unsold when you must file your tax return for the year of the lot sale, you must report the gain as taxable.

If the lot with the home sells later within two years of the first sale, you must amend the tax return for the first sale year to remove the taxable gain.

So, a vacant lot sale in a different tax year than the home sale could cause you to pay tax early with a later tax refund.

If the vacant lot sells in 2026 and the home portion sells before you file the 2026 return, then you can exclude both gains and avoid an amended return.

If the vacant lot sells first, I suggest extending your tax return to give you additional time to complete the second sale before any gain is reported.

Straddling tax years with sales will also increase the importance of allocating tax basis between the two properties to calculate separate gains.

If both properties sell within the same year, the basis allocation is not an issue that would affect the tax liability, provided the overall gain is within the exclusion.

Even if the two sales occur within the same tax year, you will have to separately report the sales if 1099 forms are received.

A real estate reporting person — such as a title company — does not have to report a sale on a 1099 form if you make the required representations that the sale exclusion applies.