Answer: The good news is that you can both sell your homes and qualify for the home-sale gain exclusion. But you’ll have to do it soon before the window of opportunity closes.
For starters, the exclusion says you don’t have to pay tax on the first $250,000 of gain from the sale of a home that you owned and used as your principal residence for two of the past five years. You can’t use that exclusion if you’ve already used it within the past two years.
Even though you probably filed a joint return the past two years, you can still each exclude the tax on the first $250,000 of home-sale profit on the sale of the homes you own individually and used individually as your respective homes before your marriage. In effect, the tax law treats you as if you’re not married for purposes of the gain-exclusion break. So, you and your spouse can jointly pull down up to $500,000 in tax-free home-sale income if you sell both homes ($250,000 if you sell only one home).
Remember: You still must meet the two-of-five year rule to qualify for the home-sale exclusion. Since you’ve already spent two years at your new principal residence, you only have one year left to sell either or both of the homes.