Got married and sold 2 houses in the same year: $250k exclusion for each, or $500k total?

[roninsoldier83]

My wife and I got married in May 2020. We both owned individual houses at the time. 

We sold her house in July 2020 and made a $270k profit. She had lived there as her sole residence for 10 years. 

We sold my house in September 2020 and made a $60k profit. I had lived there as my sole residence for almost 4 years. 

Not that it matters much, but we bought a new house for both of us to live in at the end of September 2020. We both received 1099S forms for the sale of each home. 

My wife and I have always used TurboTax (prior to knowing each other), but due to it being an odd situation, we decided to sit down with a tax consultant at H&R Block. When we punched in the numbers in their software, it showed we owe no capital gains tax, despite the fact that my wife made over $250k on the sale of her home. The software looked like it was giving us a total of $500k in collective exclusions, and showing we were well below that figure (at $330k). 

Am I missing something here?

I figured my home sale gains would be excluded (as it was well under $250k, only $60k), but thought we would end up paying capital gains on the last $20k of my wife's home sale (as she made $270k). I would prefer not to get audited or have our filing get rejected. Any reason why their tax software wouldn't include us paying capital gains on her home sale? Is there some tax loophole I don't know about? 

[RayW7]

You can't get the $500k on one of your properties. The rules say both people must have lived in the property for two years.

There are certain additional requirements a married filing joint must meet to qualify for the $500,000 exclusion. Namely, you must be able to show that all of the following are true:

• you are married and file a joint return for the year
• either you or your spouse meets the ownership test
• both you and your spouse meet the use test, and
• during the 2-year period ending on the date of the sale, neither you or your spouse excluded gain from the sale of another home.

If either spouse does not satisfy all these requirements, the exclusion is figured separately for each spouse as if they were not married. This means they can each qualify for up to a $250,000 exclusion. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. For joint owners who are not married, up to $250,000 of gain is tax free for each qualifying owner.

example As for newlyweds, assume A and B plan to buy a new home together and sell the homes each lived in prior to the marriage. Neither party satisfies the ownership and use requirements with respect to the other’s premarital home. A and B have gains of $200,000 and $300,000, respectively, incident to the sales. Whether they file jointly or individually, A’s $200,000 will be fully excluded by the $250,000 exclusion, whereas $50,000 of B’s gain—the excess over the $250,000—will be subject to tax. B may not use A’s unused exclusion on B’s gain in excess of the $250,000 limit.

[AmeliesUncle]

As you said, each house gets a $250,000 exclusion, and you should have a $20,000 gain (assuming you are factoring in closing costs and selling fees).

You may want to go back to H&R Block to have them correct it.

[roninsoldier83]

That's what I thought. H&R Block entered all of the information into their software to include date purchased, date sold, purchases prices and sale prices... and it showed zero dollars owned in capital gains. I'll give them another call, but I have a feeling I'll be getting a call from the IRS this year. 

[AmeliesUncle]

Ask to speak to a supervisor (an Enrolled Agent or CPA) about it.   Insist that they amend it for free because it was their error.

[roninsoldier83]

I'm trying to figure out why it's showing $0 owed in H&R Block's software and I just stumbled across information related to capital gains tax rates. I noticed that for Single or Married Filing Separately filers, the capital gains tax rate is 0% if you made under $40,000 ($53,600 for Head of Household). My wife only made $36,000 last year. Would this mean she does not have to pay capital gains on the $270,000 she made from the sale of her house? 

Since we just got married last year, she filed as Single/HoH the year before and it was her house alone. This is the first year we're filing Married Jointly. Combined, we made about $130,000. Since technically we both have a $250,000 exclusion, does that mean the system/the IRS looks at our incomes separately to determine the capital gains tax rates?

[AmeliesUncle]

No, assuming your are filing a Joint tax return, the tax rates are based on your Joint income.

Look at Line 7 of Form 1040.  That is where the capital gain should show up.  If it is not there, something is wrong.

[roninsoldier83]

I called H&R Block. They said they accidentally filed it as one transaction. When they separated the transactions, yes, we will have to pay capital gains on the last $20,000. I'm glad we caught it now, rather than getting a letter in the mail. Looks like we'll be filing a 1040-X. 

[AmeliesUncle]

I'm glad you got it all figured out now.

[acs11012]

@RayW7  Hoping I could ask another question since you are knowledgeable in the capital gains tax issues.

I owned a home and put it up for sale last year and it sold in August 2020. The mortgage and deed were solely under my name and I was exempt from paying cap gains in that transaction because I met all the requirements.

My fiancé and i purchased a home April 2020 but I was not on the mortgage- just the deed.

We then got married Feb 2021.

If we were both able to meet the residence requirement of two years and sell the home May 2022, it sounds like I would NOT be eligible to be exempt from capital gains because of the “look back” rule but my husband would be since he wasn’t part of that house. That means we would only be able to qualify for $250k vs the $500k exemption correct? When filling out the “certification for no information reporting” form from the Title Company during the sale it sounds some we would have to fill out a form for each of us. Does that mean when tax time rolls around we will have to file married filing separately that year? If I receive the 1099 but he doesn’t and the proceeds are less than $250k would I end up paying anyway? I figure he wouldn’t receive the 1099 because he would have answered true to the title questions. 

[TomD8]

@acs11012 --

Q:  That means we would only be able to qualify for $250k vs the $500k exemption correct?

A:   Correct.  When filing jointly, both spouses must meet both the residence and the look-back requirement in order to qualify for the $500k exclusion.  When filing separately, the spouse that qualifies for the exclusion is limited to a $250k maximum.

[acs11012]

@TomD8 so even though I’m currently at home with the kids I would have to file taxes as married but filing separately that year abs have zero income and zero withhheld right? My Husband would then use the full $250k exemption on his taxes? Since we both have to fill out the questionairre about exclusion eligibility he will not receive a 1099 but I would right? Then we would just file it but use 100% on his exemption? Sorry it’s a bit confusing for me to understand

[TomD8]

@acs11012 --

Remember you can file a joint return even if one spouse has no income.  And filing jointly is almost always better than filing separately.

If you file jointly and only one spouse is eligible for the capital gain exclusion, the exclusion is limited to $250K.

[acs11012]

Oh ok I was under the assumption we had to file “married filing separately” in order for him to qualify for the 250k exemption. That’s great news that in the event that we sell before august 2022, we could file “married filing jointly” and still receive the 250k exemption. Thanks so much for clarifying 

[acs11012]

@RayW7 

Im hoping you could help with my situation.

I have unique cap gains situation.

I owned a home and put it up for sale August 2020. The mortgage and deed were solely under my name and I was exempt from paying cap gains in that transaction because I met all the requirements.

My fiancé and i purchased a home April 2020 but I am not on the mortgage- just the deed.

We then got married Feb 2021.

We are going to sell our house May 2022- this gives us the  2 year residency mark and 2 year ownership -would my husband be able to be exempt from $250k cap gains (vs the 500k married limit) since he hasn’t used the home sales exclusion on two years and we’re married within that time frame?

I know we would not be able to qualify for the joint 500k (the profit would only be around 220-250k anyway) because I have used the exemption in the last two years but it sounds like

he would be able to qualify for the 250k.

Would we be able to still file married filing jointly next year or would we have a to file separately because he would be the only one eligible for the cap gains exemption?