Can I get tax breaks on two properties?

Dear Tax Talk,
I inherited a house about 10 years ago in Nassau County. I lived there with my mother for over 18 years and moved out two years ago. I purchased a condo in Suffolk. I am in the process of selling both places, each of which I own and have lived in for two of the last five years. Do I have capital gains? What other expenses should I expect to be deducted? I have to figure out what I will have left in order to determine what I can buy now. Please help. Thank you. -- Bonnie

Dear Bonnie,
When you inherit a house, your cost for later computing gain is its value at the date of death of the person from whom you inherit it. An individual who sells the home they have owned and lived in for two of the last five years qualifies to exclude from income up to $250,000 in gain from its sale. For a married couple, the exclusion is $500,000 in gain.

The exclusion, however, is limited to one sale every two years. Therefore, you can't sell both homes within a period of two years and qualify to exclude gain on both, even if the combined gain is less than the $250,000 or $500,000 ceiling. You'll either have to recognize gain on one or put off its sale. You can choose to recognize the gain on the home sold that produces the least gain. You do this by reporting the sale on Schedule D of your Form 1040 for the year of the sale.

Since you held both for more than a year, the capital gains rate would be 15 percent of the gain. If you put off the sale of the condo and rent it for two years before you sell it, then you can again exclude the gain at the time of sale since you will have both lived in and owned it for two years within five years. The amount that you're required to claim as depreciation during the rental period would not be excludable upon the sale.

Most of the closing costs on the sale of your home affect the gain realized and are not otherwise deductible. For example, broker commissions, satisfaction costs and credit given to the buyer are added to your cost in figuring your gain. Generally, the only thing you can deduct would be the prorated real estate taxes off the settlement statement.