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Why It’s So Important to Live in Your Home for at Least 2 Years

Live in Your Home for 2 Years

Whatever your circumstances, if you bought a home and are thinking about moving, I implore you to live in your home for at least 2 years.


Taxes. That’s why.

There’s also the fact that moving is a royal pain in the rear, and that your itch to move might be an overreaction to an issue that can be dealt with in other ways.

As this is published in 2021, however, the most important reason to stay in your home for the first two years is the avoidance of unnecessary capital gains taxes that could be levied on you if you move out even one day shy of the two year mark.


Live in Your Home for 2 Years


No Capital Gains Taxes


The Internal Revenue Service, known to you and me as the IRS, spells out the requirements for the Section 121 Exclusion of capital gains of up to $250,000 per person ($500,000 for a married couple) when selling a home.

For further reading, see a summary in IRS Topic No. 701 and for a detailed explanation that will cover any offbeat scenario you could come up with, see IRS Publication 523, Selling Your Home.

I’ll do my best to cover the most common scenarios to keep you from having to read the words of the IRS. Their information is helpful, but often overly thorough and bogged down with language that can be difficult to decipher.

The bottom line is that, if you have lived in your primary residence (you generally only get one of these) for a total of 24 months in the previous 5 years, you won’t owe any capital gains taxes on the first $250,000 of gains if single, and $500,000 if married.

Either spouse or both spouses can own the home, and it doesn’t matter which 24 months you lived there, as long as they were within the last 5 years.

If you lived there for 2 years and then somewhere else for almost 3 years before you sell, you qualify for the exclusion. If it was a second home for decades and then you moved in for two full years before selling, you qualify for the exclusion. You could live in the home for 18 months, live elsewhere for two and a half years, come back for 6 months and then sell the place, and you’d still qualify for the exclusion.



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Determining Your Primary Residence


Your primary residence, according to the IRS, is the place you consider to be your home. It’s where your personal effects are kept, and it should be the residence at which you spend the most time.

If you own multiple homes and feel there could be some gray area as to which is primary, there are some things you can do to help establish one place as your primary home.

You should receive your mail most packages at your primary residence.

Your driver’s license or identification card should have your primary residence’s address.

Your banking should be done near your primary residence, and checks should be labeled with that address.

If there are doubts, the IRS could look at where your kids go to school, clubs you’ve joined, religious organizations you belong to, where you doctor, get your taxes done, etc…

These principles also apply to your state of residence. If you own a vacation home in Florida, but it’s clear that your life is lived mainly in New York, you can’t claim the condo in Florida as your primary home for purposes of avoiding state and local income taxes or for the primary residence capital gains exclusion.


Partial Exclusion


If you didn’t live in your primary residence for a full two years, and you left for a specific reason that the IRS deems worthy, you may qualify for a partial exclusion.

Taking a new job at least 50 miles away from your current home is one reason you could qualify for a partial exclusion, even if you didn’t live in your primary residence for 24 months.

Another is moving for health-related reasons, either for your own health issues or to take care of a family member, including parents, grandparents, children, grandchildren, in-laws, aunts, uncles, nephews, and nieces.

The IRS is also sympathetic to a variety of circumstances they refer to as “unforeseeable events.” For example, if an owner dies, divorces, gives birth to twins (or triplets, quadruplets, etc…), your home is destroyed, you become newly qualified for unemployment compensation, or you can no longer afford the home for other reasons.

If you gave birth to triplets, lost your home to a tornado, had to move for a new job closer to your ailing parents, I hope the universe hooks you up with something better than a capital gains exclusion.

If you are eligible for a partial exclusion for any or all of the above reasons, the maximum dollar value of the exclusion is reduced by the percentage of the 2-year mark that you lived in the home.

For example, if you only lived there for 1 of the previous five years, your exclusion is $125,000 for an individual and $250,000 per couple if married, filing jointly.

If you lived there 6 months, your exclusion is $62,500 single or $125,000 if married filing jointly. It seems unlikely that you could see gains that high in such a short period of time, but lately, anything seems possible.


Selling Three Homes


As this is published on May 18, 2021 (my 45 1/2 birthday), we are closing on the sale of one home today. We purchased this home in August of 2019, largely as a place to store our belongings while looking for a lake home larger than the cabin that had become our primary (and only) home earlier that summer.

This weekend, we will begin showing our primary residence, the place we moved into and made our homebase when we moved from Minnesota to Michigan in June of 2019.

We are renovating a third home that will become our primary residence when more work is done and we’ve sold our current primary residence, presumably in late June or early July of 2021.

Our ultimate goal is to build across the street from the place we’re currently renovating. We own the nearly one-acre lot that once held 4 small cabins, and it will eventually be the site of our next “forever home.”


Home One

The $90,000 house we’re selling now for quite a bit more than that was owned by us for less than two years. That doesn’t really matter in this case. It wasn’t our primary residence, anyway. We had already established “Home Two” as our primary home, and we’ve always expected to owe capital gains taxes when selling this one.

If we had decided to keep Home One as a rental propery, we could have one day moved back into it for two years to avoid the capital gains hit before selling, but I can’t imagine we’d actually consider doing so once we’ve built a place on the lake. I’m just pointing out that there is a way to make a home qualify for the exclusion later on even if it does not at the moment.

Fortunately, I’ve got six figures of carried-over capital losses from prior Tax Loss Harvesting efforts, so I won’t actually be paying capital gains taxes for 2021 on the sale of this home. I will, however, see my carryover loss balance shrink by about $50,000.


Home Two

For most of the last decade, this was our second home. It became our primary home when we moved there more than 23 months ago. We enjoy summers playing in the lake, winters skiing at nearby ski resorts, and hiking trails around the area in the spring and fall.

We decided to keep it as our primary home and lived accordingly, keeping our mail, driver’s licenses, etc… there and spending ample time at the place. The timing should work out well to close on a potential sale of the home shortly after our 24 months are up to qualify for the exclusion.

We bought the place for $15,400, put another $50,000 or so into it, and will sell it for a low six-figure profit about 10 years later.


Home Three

Home Three is the place we recently purchased and are working on now. There are many walls to be painted, floors and fixtures to be replaced, and it won’t be a home until we move our furniture from Home Two to Home Three after we’ve sold Home Two.

While we do plan to build across the road (Home Four?) at some point, I’m in no hurry. For one, the price of lumber is currently outrageous and building supplies are in short supply and often delayed.

Additionally, we’re also thinking it would be wise to make Home Three our primary home for at least 24 months. I don’t want to have to track hundreds of receipts to show what we’ve put into it. I’m not sure how to best assign a value to this home as compared to the waterfront lot that was bundled with it. Finally, there’s a good chance we’ll sell this one at a profit, as well, and living in the home for 2 years will qualify us for the primary residence capital gains exclusion once again.


You Can Make It Two Years


It’s well worth it to make it the two years if at all possible.

Capital Gains Taxes are a minimum of 15% for most of us, although when retired or earning a five-figure annual income, they could be 0%.

They’ll be bumped another 3.8% if earning at least $200,000 as an individual or $250,000 as a couple to help pay for the Affordable Care Act subsidies for lower income households.

If you’re in the top federal income tax bracket, add another 5%, and don’t forget that 40+ states levy ordinary state income tax on capital gains. It’s not uncommon for high-income households to pay 30% or more in capital gains taxes.

If proposed legislation is enacted, for taxpayers with $1 Million in total taxable income, capital gains rates could be 43.4% at the federal level before state income tax is applied.

I’d do my best to avoid paying those taxes when selling a home, especially when the government gives you a relatively easy way out.



Have you taken advantage of the primary residence gain exclusion? Have you had to pay capital gains taxes on the sale of a primary home? Enlighten us with your story in the comments below!



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5 thoughts on “Why It’s So Important to Live in Your Home for at Least 2 Years”

  1. It’s well worth it to make it the two years if at all possible. Very Good Article thanks sir Ji I wish u

  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. How does one keep track of all the capital improvements that increase cost basis in the house when selling (renovations, additions, etc)? Does IRS want receipts for all this?

    • If you owned the home for 2+years, your cost basis is irrelevant.

      However, if there’s a chance you may not be in the home 2 years (and I supposed there’s always a chance), it’s ideal to keep receipts. Money spent on home improvement increases your cost basis in the asset, reducing your capital gain (or increasing your loss) when you well the property.


  4. It’s quite amazing what kind of tax breaks you can get around owning a home. The two year primary residence exception is a prime example of a good tax break!

  5. Excellent post POF,

    This is yet another reason why owning your primary resident is a long game. It’s a minimum of two years just to get any tax advantage. This is assuming the hidden costs and realtor fees haven’t netted out any gains in appreciation of the residence.


    Psy-FI MD


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