Yes, there is an exemption that you can take on the capital gains when you sell what is considered to be your primary residence. And as you said, the rule to be considered your primary residence is that you must have owned the property for at least 2 years and you must have lived in the home for at least 2 of the past 5 years. If you meet those requirements, then a single taxpayer is allowed to exclude $250,000 from the gain on the sale of the home, or $500,000 from the gain if you are married filing a joint return.
However, there are a couple of other things you need to be aware of. First of all, that exclusion can only be claimed once every two years, regardless of whether or not you and your wife would establish separate residency. In other words, if you decided to sell both houses in the same year, you could not each take a deduction of $250,000 on each of the homes. Once you sold the first home you would have to wait another two years before either of you could claim the exemption again on the sale of a second home.
The other thing you need to be aware of is that the rules on that exemption are going to be changing on January 1st, 2009. Under the current regulation, you only need to live in the home for 2 of the last 5 years to claim the full exclusion amount. Under the new rules going into effect on January 1st, you will still need to meet the same rules of having owned the home 2 years and having lived in it for 2 of the past 5 years, BUT you will only be allowed to deduct a prorated portion of the exemption amount, based on the actual amount of time you lived in the home.
As an example - under the new rules if you own a home for 5 years and you live in it for the first 2 years and then rent it out or let it sit vacant for the next 3 years, then when you go to sell that home you can only take 40% of the exemption, because you only lived in the home for 40% of the time you owned it.
So in either case, establishing separate residency is not going to help you claim this tax credit any quicker. Once you sell the first home you will still have to wait 2 years before applying again for the credit. And once the new rules go into effect, then your exclusion amount will be prorated based on the amount of time you actually lived in the home you plan to sell first.
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