Dear Tax Talk:
My husband and I were married Oct. 7, 2007. He was living 80 miles away when we got married and he took a new job in my city and we moved in together in December 2007.
Prior to moving in together, I sold my residence of 19 years. I paid $79,500 for it in 1989 and sold it for $589,000 in October 2008. During the years I owned it, I refinanced it several times to make home improvements. At the time I sold the home, I owed $238,000 on it.
My husband's home (80 miles away) is currently for sale. He paid $450,000 for it in 2004, and it is now for sale for $739,000. We expect that it will sell within in the next few months.
My question concerns our capital gains on the home I sold in October. Is my gain the difference between the original sales price of $79,500 and the $589,000 sales price or between the current mortgage amounts of $238,000 and $589,000? Am I limited to the $250,000 capital gains exemption or $500,000 exemption because I am now married? When my husband's home sells, is he limited to $250,000 or eligible for the $500,000 exemption because of the marriage?
We bought a new home that closed Dec. 31, 2007. The purchase price of the home was $899,000. We put $200,000 down on the home from the proceeds of my home sale and plan to pay off the second when my husband's home sells.
Please let us know what our capital gains tax would be.
You can exclude up to $250,000 in gain from the sale of your main home if you have owned it and used it as your main home for more than two years. A married couple can exclude up to $500,000 in gains if they meet the ownership and use tests. In order to get the $500,000 exclusion on one home, both spouses would have had to use the home as their main home for at least two years. Because this is not the case, the maximum exclusion on each home is $250,000, figured separately.
Your basis in your home for figuring your gains is your original cost plus improvements. The amount of your mortgage balance does not directly affect your cost basis. For example, in your case you have refinanced your home several times to make improvements.
The cost of the improvements actually made is added to your original purchase price to figure your cost basis. The amount of refinancing does not add to your cost. If you borrowed $200,000 to add a pool and other structures and only spent $150,000 on these items, then your cost basis is increased by the $150,000 actually spent, even though you owe $200,000 more.
The gain on your home appears to be more than $250,000 and your husband's is slightly less. Unfortunately, any unused exclusion that he may have cannot be added to your exclusion. Neither the purchase of the new home nor the use of the proceeds of the former homes will affect your taxable gain.