taxes

Capital gains rules for citizens, foreigners

George SaenzDear Tax Talk,
I am a U.S. citizen married to a Norwegian, and we live in Norway. I file U.S. tax returns as married filing separately. We owned our home together.

We have sold our home, and my husband is currently going through the green-card process. We expect to move to the U.S. soon.

We bought our home for about $500,000 and sold it 11 years later for around $1 million. After deducting our mortgage, we are left with about $820,000 in profit. Would we have to pay capital gains on this? We plan to purchase a home and perhaps a condo that will likely exceed the profit, so the pre-1997 rules actually benefit us more than the current rules.

Also, does it matter that he is a nonresident and I am a U.S. citizen living abroad at the time of sale? We haven't transferred the funds yet, as we are uncertain if we should wait until he is a legal resident or not.

How can we avoid (or lessen) capital gains in this case?

Thank you for your help!
-- Lynne

Dear Lynne,
The $820,000 is your net proceeds from the sale of the home, not your profit. Profit is the difference between the purchase price and sales price. The gain, then, of $500,000 split between you and your husband would mean each had a gain of $250,000.

The capital gains rules differ for you and your husband. Since the gain is not a U.S. source, your husband obviously would have no U.S. tax consequences.

As a U.S. citizen, you're obligated to file and declare your worldwide income in accordance with the U.S. tax laws. Under the U.S. law, an individual is allowed to exclude up to $250,000 in gain from the sale of their home. The exclusion is available even though the home is outside the U.S. The exclusion applies to a home that you have occupied for two of the last five years as your principal residence. You've been in the home for 11 years, so you certainly qualify for the exclusion.

However, when a married couple files separately, the general rules are often modified. Fortunately in your case, a married couple filing separately is still eligible for the $250,000 gain exclusion. Internal Revenue Service Publication 523 discusses the sale of your main home.

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