Getting Remarried? Preserve Home Sale Gain Exclusion

If you play your cards right, you can be excluded from federal income tax gain of up to a half million dollars when you sell your principal residence.

Don’t jeopardize the home sale gain exclusion break. Make sure that you adhere to the strict requirements under the tax law.

In some cases, you might postpone a sale to qualify for the exclusion. Things can get especially tricky if you’re remarrying and you or your spouse – or both of you – own homes you want to sell.

As long as you’ve owned and used your home as your principal residence for at least two years during the five year period ending on the sale date, you can exclude up to $250,000 of home sale profit if you’re single filer or up to $500,000 for joint filers.

Furthermore, there is no current limit on the number of times you can claim the exclusion. If you file a joint return, you can claim the maximum $500,000 exclusion if (1) either spouse meets the two year ownership rule, (2) both spouses meet the two year use rule and (3) neither spouse has claimed the exclusion within the last two years. This is particularly important to remember for those who have divorced or remarried or will do so soon.

For instance, suppose your fiance sold a home in 2020 and claimed the exclusion as a single taxpayer. If you get married and sell your own home in 2021, you can’t claim the larger $500,000 exclusion for your home on a joint return.

This could result in a much bigger taxable gain. Even if you’ve owned the home for more than a year, the gain is taxed at a 15% federal rate or at the maximum 20% rate if your 2021 joint taxable income exceeds $501,600.

Conversely, you might benefit from these rules if you sell a home where you’ve been living on your own and your new spouse hasn’t claimed the exclusion within the last two years. If you and your new spouse live in your home for at least two years, you could qualify for the larger $500,000 gain exclusion.

Small Business Tax Strategies

May 2021