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George Saenz, the Tax Talk columnistTwo houses, newlyweds and capital gains

Dear Tax Talk,
I have been a homeowner since 2002. I was single when I purchased my home and since then have married. The title is still solely in my name. My wife bought a home in 2004 and we married later that year. I moved into her home in 2005 and now rent my home. The title on her home is also solely in her name. If we decide to sell both homes within the same two-year period, would we be liable to pay capital gains on one? Even if technically both titles show a single owner? Helpful information: We have joint federal tax returns for 2004 and 2005.
-- Ty

Dear Ty,
You can exclude up to $500,000 of the gain on the sale of your home if you meet all the following conditions:

  • You are married and file a joint return for the year.
  • Either you or your spouse meets the ownership test.
  • Both you and your spouse meet the use test. (You might not meet this test.)
  • During the two-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.
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If either spouse does not satisfy all these requirements, which you wouldn't since you're contemplating two sales, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married, and the amounts were figured separately.

On a separate basis, each of you can exclude up to $250,000 of the gain on the sale of your respective homes if all of the following are true.

  • You meet the ownership test (owned it for two of the last five years).
  • You meet the use test (used it, for two of the last five years, as your home).
  • During the two-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

Since you're trying to sell two homes within the same two-year period, you cannot meet the rules that qualify you for the joint $500,000 exclusion. Instead you need to determine if you can compute the sales separately and each use the available $250,000 exclusion.

Since the sale is contemplated for 2006, you still fall within the two-of-the-last-five-year rule for the use test. Hence you would qualify to exclude up to $250,000 in gain, and so would your wife on your respective properties.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "Taxes" as the topic.'s corrections policy-- Posted: March 21, 2006
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