Capital gains and your home sale
However, husband and wife must pass the use test; that is, each must live in the residence for two years. But the shared use doesn't have to be while you file jointly. If you and your now-husband shared the home for 1 1/2 years before tying the knot and then six months as newlyweds, the IRS will allow you to claim the exemption. But if he didn't move in until the wedding day, you're out of tax-exclusion luck.
And while you're learning about your new spouse, make sure you find out all about his or her previous home-sale history. "The two-year eligibility rule applies to both spouses, so full home disclosure is another financial area you need to consider when getting married," says Trinz. "You need to find out what you're getting."
Under this couple requirement, if either spouse sold a home and used the exclusion within two years of the sale of any jointly owned property, the couple can't claim the exclusion. That means if your new husband sold his town house a month before the wedding, then you'll have to wait two years after that property's sale date before you can dispose of your shared marital residence totally tax-free.
In some cases, a couple might be able to exclude some profit from taxation, but not the full $500,000 allowed joint filers, based on one spouse's eligibility qualifications.
Figuring out the correct exclusion amount
OK, you, and your better half if you're married, met the use and ownership tests, as well as the two-year previous-sale time limit. Now it's time to do the math to avoid writing a big check to the U.S. Treasury.
As a seller, you naturally focus on how much you got for your house. That is an important number, but not the only one you'll need when it comes to figuring out whether you'll owe taxes on the sale.
It's your gain, or profit, that determines the size or lack of a tax bill. In fact, you can sell your house for $1 million and still not owe Uncle Sam as long as the profit portion was not more than $250,000 or $500,000, depending on your tax filing status. If you can exclude all the gain, then you owe no taxes.
To arrive at your gain amount, you first must establish your basis in the home. For most people, says Trinz, this is what you paid for the residence and all capital improvements you've made, such as adding a room or finishing a basement. Also, if you sold a residence prior to the 1997 law change and rolled the profit into the home you're now selling, you must account for that rollover amount; your basis will decrease by the amount of gain you postponed years ago.