This Week's Q & A

Q: My fiancée and I will be getting married next summer. Each of us currently owns a house, which we plan to sell so we can build a new home that we will own jointly. My question has to do with the timing of the sales. In order for both of us to qualify for the $250,000 exclusion of gain on the homes we sell, do we have to be single when the properties are sold?

A: Here are the relevant requirements. To exclude the gain on the sale of a primary residence, you must:

	Own the house for at least two of the five years preceding the sale; and
	Occupy and use the property as your primary residence for the same period

Assuming both of you meet those basic requirements, if you are married and filing jointly, each of you could exclude up to $250,000 of the gain on the sale of your respective residences. However, you could not claim the maximum exclusion ($500,000) allowed for a married couple on either house, because neither of you would meet the occupancy and use test on the other’s dwelling. (Although only one spouse must meet the ownership test, both must meet the occupancy and use requirements in order to claim the maximum benefit.) Additionally, if either or both of you exercise the exclusion now, neither of you will be able to exercise it again for at least two years. However, when you eventually sell the house you are planning to build (assuming you are still married and filing jointly), you will be able to claim the maximum ($500,000) exclusion.
This generally describes the way the IRS rules apply, but, as you can tell, they are complicated. You should check with an accountant before you finalize your plans to avoid any unpleasant tax surprises.