Discussion:SALE OF TWO PRINCIPAL RESIDENCES
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Discussion Forum Index --> Tax Questions --> SALE OF TWO PRINCIPAL RESIDENCES
| 17 February 2006 | |
| I have a client and she and her husband plan on selling two homes this year.
Home #1 belonged to husband before they got married. It is in his name only. He has owned the home for 5 years. He used the home as his principal residence for 3 years and rented it for 2. He will have a gain of $120,000. He plans on using his exclusion on this home.(I understand all the depreciation recapture). Home #2 is owned by both husband and wife. They have both lived in and owned the home for 2 years. They will have a gain of $160,000, The wife qualifies to exclude $250,000. The husband does not because of the exclusion used on Home #1. If they file a joint return can the wife use her exclusion and exclude all of the gain because it is under $250,000 or does it need to be treated as two sales. One for her excluding the $80,000 (one half the gain) and one for him with a taxable capital gain of $80,000? Thanks Colleen | |
| 17 February 2006 | |
| Since Sec. 121(b)(2)(B) appears to apply, the gain from the sale of both homes would appear to be fully excludible. This is based on the statutory language “…..each spouse will be treated as owning the property during the period that either spouse owned the property”. This suggests that the joint ownership between spouses is ignored for purposes of Sec. 121 when a joint return is filed. | |
| 17 February 2006 | |
| In order to get the exclusion on both homes, it would appear that the husband’s home would need to be sold first. | |
| 17 February 2006 | |
| Why would the husbands have to be sold first. If he chose not to use the exclusion on the jointly owned property, her exclusion would still cover the gain. As long as he did not use it on the first it would be available for the second one. | |
| 17 February 2006 | |
| Under Sec. 121(b)(2)(B), the $250,000 exclusions are applied individually to each home as if the taxpayers were single.
If the jointly owned home is sold first, then the only excludible gain on a joint return would be the gain on that specific house – up to a maximum of $500,000, unless they elect out of Sec. 121 completely for this house. Sec. 121(b)(2)(A). This is due to the fact that both spouses satisfy the use test on the jointly owned home and neither spouse has sold a home within the past two years. This would leave the gain on the husband’s home subject to tax. However, if the husband’s home is sold first, then Sec. 121(b)(2)(A) [$500,000 exclusion] becomes inapplicable to that sale because of Sec. 121(b)(2)(A)(ii) [2 year use requirement by both spouses], and the first $250,000 of the gain on the husband’s house is then excludible under Sec. 121(b)(2)(B) [other joint return rule]. In addition, since the jointly owned house is now ineligible for the $500,000 exclusion due to Sec. 121(b)(2)(A)(iii) [sale of a home within past 2 years by husband], a second $250,000 exclusion is available on the jointly owned home under Sec. 121(b)(2)(B). Notice that this strategy works only because we are treating the wife as 100% owner of the jointly owned home, which appears to be allowable under the last sentence in Sec. 121(b)(2)(B). | |
