Home Sales by Newlyweds

June is known traditionally as a popular month for weddings, so we thought it would be a good time to mention a tax-saving opportunity available to newlyweds as well as other taxpayers.

One of the most common large-scale financial transactions most of us encounter is the sale of our home, and newlyweds have a unique opportunity to exclude home sale gains. As background, taxpayers are allowed to exclude from federal taxation up to $250,000 ($500,000 if married filing jointly) of gain realized on the sale or exchange of a principal personal residence. Gain is computed based on the selling price less the adjusted cost basis of the residence plus any selling expenses.

Married taxpayers filing a joint return for the year of sale may exclude up to $500,000 of gain if (a) either spouse owned the home at least two of the five years prior to the sale, (b) both spouses used the home as a principal residence for at least two of the five years prior to the sale, and (c) neither spouse is ineligible for the exclusion because he or she had sold another home within the two-year period ending on the sale date to which the exclusion applied.

If only one spouse meets the qualifications of items (b) and (c), that spouse may still be entitled to exclude up to $250,000 of gain on the joint return. When only one individual entering a marriage owns a principal residence, close attention to the calendar and to usage by the nonowning spouse can make the difference between a completely tax-free and partially taxed gain.

If both parties entering a marriage intend to move into a new (to them) principal residence after their marriage, each can sell his or her former residence and exclude up to $250,000 of gain if they each meet the three qualifications. The provision limiting the exclusion to only one sale every two years by the taxpayer does not prevent a husband and wife from filing a joint return and each excluding up to $250,000 of gain from the sale or exchange of each spouse's principal residence owned at the time of marriage. However, this is only the case when each spouse would be permitted to exclude up to $250,000 of gain if they filed separate returns.

Home sale gain exclusion qualifications can be mystifying, so please contact us to discuss the technical and tax-saving aspects of excluding a home sale gain.