Same-sex couples denied property tax perks
By Marcie Geffner • Bankrate.com

Most married couples take their special tax benefits as property owners for granted. But gay and lesbian couples who tie the knot in California or Massachusetts may not be able to take full advantage of certain property-related tax breaks because federal law doesn't recognize their marriages.

California and Massachusetts now consider so-called "same-sex" marriages to be equivalent to traditional, now so-called "opposite sex," marriages. However, federal agencies, such as the Internal Revenue Service, must take their cue from the 1996 Defense of Marriage Act, or DOMA, according to John W. Roth, a senior tax analyst with tax-software provider CHH Group. DOMA stipulates that only a marriage between a man and a woman is valid in the U.S.

"If two people get married, the federal government is not interested in that until they try to take advantage of a preferential tax treatment that is granted on the basis of marital status," says Jo Ann Citron, a Boston-based attorney who has handled same-sex divorce cases in Massachusetts. "Once they attempt to avail themselves of that, the federal government takes notice."

Some property-related tax breaks at issue:

• Exclusion of capital gains tax on the sale of a principal residence. • Exemption from capital gains tax on property transfers incident to divorce. • Temporary $7,500 tax credit, subject to recapture, for certain homebuyers.

Capital gains tax on sale of a principal residence
Federal law allows married couples who sell a home they've occupied as a principal residence to exclude $500,000 of their gain on the sale of that residence from capital gains tax, subject to certain rules. Single taxpayers can shield half that amount, or $250,000.

But same-sex couples who get married are treated as if they were single for federal income tax purposes. That means they can each exclude up to $250,000 of the total capital gain on the sale of their home as individuals, but they can't exclude a combined $500,000.

"They would have to each be qualified to take $250,000," Roth says.

That seems straightforward, but it's not. Suppose a same-sex married couple sold a principal residence and netted a gain of more than $250,000, but only one of the spouses earned income and filed a tax return. In that case, the total exclusion would be limited to the single taxpayer's $250,000, even if the couple owned the property together.

Capital gains taxes on transfer of property
The federal capital gains tax can also trip up same-sex couples who get divorced, even though state law dictates how property is divided in divorce cases, Citron says.

State courts traditionally granted a divorcing couple's family home to the wife, in large part because she often also had custody of the couple's children. Fair or not, that scenario illustrates why federal law specifically exempts transfers of property between spouses from capital gains tax if the transfer is incident to a divorce, among other circumstances.

But because same-sex marriages aren't recognized by federal law, same-sex divorces don't exist either. The only divorce that exists under federal law is between a man and a woman, Roth explains.

That means if a state court orders a transfer of property between same-sex spouses who divorce, that transfer can trigger capital gains tax.

"If you get divorced, the marital home is transferred to one spouse or the other or sold. If one spouse wants to transfer property, this doesn't trigger capital gains tax for opposite-sex married couples. If they are a same-sex couple whose marriage is not recognized by the federal government, that transaction is taxable," Citron says.

The $250,000 capital gains exclusion can be applied, but beyond that, same-sex couples who transfer property as a result of divorce can face a hefty capital gains tax bill.