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Dear Tax Talk,
I got married in September 2008. My wife owns a condo that she purchased in 2005. She has used it as her primary residence for the entire time period. I own a house I purchased in 2000 that has been my primary residence up to the wedding date (I moved in with my wife at her condo).
We want to sell both the condo and the house in order to buy a home together. The condo is solely in her name and the house is solely in my name. We intend to file our taxes as married filing jointly for 2009 (the year we intend to sell both homes and buy another together) because of our Roth IRAs.
The estimated profit from the condo is about $50,000, and the estimated profit from the house will be $150,000. Will we be liable for capital gains? What is the limit on the capital gains for each of us separately? Do we have to use the proceeds from the house sales on the purchase of another home?
The law no longer requires you to reinvest home sale proceeds in order to avoid gain recognition. Current law provides an exclusion of up to $250,000 in gain on the sale of a principal residence once every two years. The exclusion is doubled for a married couple so that they can exclude up to $500,000 in gain from their main home. You don’t have to reinvest the proceeds and conversely, reinvesting does not increase the exclusion.
To qualify for the exclusion, the individual must have owned and lived in the home as a principal residence for two of the last five years. Separately, you each meet the two-year rule with respect to your premarital homes. However, together you do not meet the rules.
If either spouse does not satisfy all these requirements, the maximum exclusion that the couple can claim is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. This means that each of you is eligible to claim up to $250,000 in gain exclusion on the sale of the premarital homes. Since your anticipated profit on each home is less than the exclusion, you will not have to report either the sale or the profit.
The rule would work against you if your home produced more than $250,000 in profit but together you still had less than the $500,000 limit. In this case, any profit in excess of the $250,000 would be reportable and taxable even though together you are still under the $500,000 cap.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.