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Tax Talk with George Saenz

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Capital gains exclusion on the sale of a home

Dear Tax Talk:
I am a Realtor and have some clients thinking about listing their home. The wife owned the home for two years before selling it to her mother, who then sold it to her husband a year ago. He is the only one on the deed because he got a VA loan. The wife has lived there throughout these changes.

Will they get hit with capital gains taxes? They will be purchasing a new home with the proceeds of this one. Should I advise them to sell or stay put? Any advice would be extremely helpful.
Thank you,

Dear Dawn:
It's a shame they didn't use you as a Realtor for each sale. I guess they ran out of occupants to sell it to and they don't want to break the habit. Assuming you and they are willing to accept selling it to someone who is not an occupant, you may still get a tax break.

I'm assuming that the husband in this situation is the husband of the wife, not of the mother, because you didn't refer to him as the wife's father.

You can qualify for the $250,000 exclusion on the sale of your home if you owned and lived in it as your principal residence for two of the last five years.

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Since the husband and wife are one for this purpose, they qualify for the exclusion of $250,000. The exclusion rises to $500,000 for a married couple if:

1. A joint return is filed,
2. Either spouse meets the ownership requirement of two years in the last five (you didn't specify when the wife owned the property),
3. Both spouses meet the two-year use rule, and
4. Neither spouse sold a separate house in the last two years and claimed exclusion.

If the conditions are satisfied, they can claim the higher exclusion for a married couple.

Good luck to you.

-- Posted: Oct. 11, 2001

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See Also
Tax Basics: owning a home
Paid points? Check out the tax rules on deducting them
Taxes on second-home sales

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