This Week's Q & A

Q: Shortly after my divorce, in November of 1998, I purchased a small condominium for my two young children and myself. At the time, I did not anticipate ever being married again, but there are some things you can’t predict. I have met someone else and we’re going to be married in July of this year. My new spouse and I plan to sell the homes we currently own and purchase a larger dwelling that can accommodate our combined families. That won’t be a problem for my prospective husband, because he’s owned his home since 1987 and so will be eligible to exclude the gain when he sells. But because I have not owned and occupied my condominium for two years, I’m told, I won’t be eligible for the exclusion and so will have to pay taxes on any gain I realize on the sale. I thought there was a provision for “unforeseen circumstances” in the IRS code, but those regulations haven’t been written yet and no one with whom I’ve spoken at the IRS seems to know when those guidelines will be issued. Can you suggest any other solution to this potentially costly dilemma?

A: Yes, and it doesn’t require hoping for a favorable ruling on a murky tax question. Based on the timetable you outlined, you have to hold on to your existing house until November of this year to meet the two-year ownership and occupancy requirement for excluding the gain on the sale of your primary residence. So, why not just delay your sale until then? You don’t have to postpone the wedding – only the sale of your existing home.

This strategy has some obvious disadvantages. Interest rates (and home prices) may rise in the interim, increasing your purchase costs; and in a tight market, you may lose out on some homebuying opportunities while you’re running out the tax clock. You’ll have to weigh the risks you incur by waiting against the costs you’ll incur by selling prematurely.

Delaying the sale also will require you to continue living in your now too-small unit for longer than you’d like, but we’re only talking about a few extra months. And I suspect the temporary overcrowding will be less painful than the tax bill you’ll face if you can’t exclude the gain on the sale of your existing home.