Dear Tax Talk,
I am in the military and recently moved from New Jersey to Alaska. My wife (we married in October 2014) will meet me in Alaska in August after the kids’ school finishes and she sells the house. The house is only in her name. She purchased the house in June 2012 and has been using the house as her main/only residence for that time. Will we be charged capital gains tax, or will we qualify for the home-sale exclusion? Thanks.
The answer depends on whether you and your wife meet the IRS requirements for excluding gain on the sale of your home.
Homes qualify for a $250,000 exclusion of gain on the sale, which means profits above your cost up to $250,000 are not subject to tax. This home-sale exclusion serves as a nice tax incentive for homeownership. For married couples filing jointly, the exclusion amount is $500,000. But as is usually the case, you have to read the fine print to make sure you qualify.
First of all, you have to have “owned” the home and “used” it as your main home during at least two years out of the past five years before the date of the sale. Additionally, your wife cannot have acquired the home though a like-kind exchange during the past five years, and she cannot have claimed an exclusion from the gain on another home during any two-year period ending on the date of the sale of the current home.
By being married, if your wife meets the “ownership” test, then both of you have met the “ownership” test. Sounds good so far, right? Well, now for the fine print: Each of you must individually meet the “use,” or residence, test. If you are not able to meet the residence test, then you will not be able to exclude up to $500,000 of the gain.
But all is not lost. If your wife meets the ownership and the use tests, she will be able to exclude $250,000 of gain on the sale of the residence on your jointly filed tax return.
Best wishes on your new marriage and thank you for your service to our country.
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