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.