Being newly wedded, my wife is selling the home she lived in since 2004
Since she is the one who lived in it as your primary residence for at least 2 of the last 5 years she owned it, counting back from the closing date of the sale, she will qualify for a $250K capital gains tax exemption on your joint tax return. (Assuming you were married in 2022 or earlier.)
using homeowner financing.
I assume you mean this sale is seller financed. Make absolutely certain you have all your ducks in a row on the legal and paperwork front. From what I've seen in the past with seller financed loans, the chances of having to foreclose on the property over the next two years is in excess of 50%. Having to foreclose within the next 5 years is more than 90% probability. Hopefully, that doesn't happen. But don't count on it to supplement your monthly income.
Does Section 121 exclusion apply and do we report received payments?
The exclusion of $250K definitely applies to her, since I"m betting it was her primary residence for at least 2 of the last 5 years she owned it. But the additional $250K exclusion for you (her spouse) most likely does not apply, if it was not also "your" primary residence for at least 2 of the last 5 years she owned it.
