Qs for Home Sale Exclusion of Gain?

[jamesyliu1210]

I and my wife had lived in two different states (Indiana and Michigan) due to employment. We jointly owned two homes. First home is at Indiana which has been primary/principal residency since 2003. Then I moved to Michigan due to job and bought second home in Michigan in 2012. For property TAX reason, we had Michigan home as Principal Residence Exemption (PRE) since and changed Indiana home to non-homestead deduction (nonpricinpal home). We have been filed tax as “married jointly”.

1. We sold the Michigan home in October, 2020,  (bought another home at same time in Michigan). This home sale gained $200,000.
2. We then sold Indiana home in August, 2021 (wife retired). This home sale also gained $200,000.

Summary: Both Indiana and Michigan homes meet the IRS exclusion requirement of self live in the past 2 of 5 years and gain is not over $500,000. They both for self-live, NOT for rental. BUT after reading “IRS Tax topic 701; Publication 523”; I believe I do not qualify “Eligibility Step 4 - Look-Back”

My questions:

1). Want to confirm that I should pay one of the home sale TAX.

2). Can both home sale be gain exclusive due to couple employment separation?

3). Can we file partial home sale gain exclusion, because my wife got part-time job after moved to Michigan.

Thanks.  James

[Mike9241 · Accepted solution]

what i can't answer is if there are any issues with claiming Michigan as a principal residence for real estate tax purposes since it seems 

you are saying your spouse lived in and owned the Indiana residence from 2003 until sold in 2021 and you never occupied it as a principal residence for any 2 out of 5 years before its sale

you are saying you lived in and owned the Michigan residence from 2012 until sold in 2020 and your spouse never occupied it as a principal residence for any 2 out of 5 years before its sale

the rules for a married couple to take the $500,000 exclusion on their principal residence is that BOTH must occupy it for 2 out of 5 years before sale and one of you must own it for 2 out 5 years before the sale.

since I think you're saying each had a separate residence that they occupied as detailed above,  only you would have been entitled to claim up to a $250K exclusion on the MI home. in the same context your spouse is entitled to claim up to a $250K exclusion on the sale of the IN home

section 121 of the code and regs states that if each spouse sells a home and each meets the ownership and use tests on their principal residence and has not used previously use the exclusion on the sale of their home within two years of the current sale of their home, each spouse can exclude up to $250K  of gain on his own home. since both spouses do not both meet the use test for either residence, the allowable exclusion is limited to the sum of the amounts that each spouse would be qualified to exclude if they had not been married (IE $250K). 

put another way if I'm correct about the use of the home as a principal residence your sale in 2020 does not disqualify her from using her using the exclusion on her sale.

[NCperson]

look at worksheet 1 on page 7 of Publication 523: (first section about married - filing joint - over to the right)

https://www.irs.gov/pub/irs-pdf/p523.pdf

If you’re not eligible for the maximum exclusion limit, then you should…

Determine if either spouse is eligible for the full limit as a single person.

why aren't each of you eligible for a $250,000 exclusion? if you were each single, why wouldn't you each meet all the required tests? 

[jamesyliu1210]

I lived in Michigan house from 2012 – 2020 and my wife lived in Indiana house at same period. However, we jointly owned both homes (title/property deed has both of us).

[jamesyliu1210]

thanks.

I lived in Michigan house from 2012 – 2020 and my wife lived in Indiana house at same period. However, we jointly owned both homes (title/property deed has both of us). Plus, we file our TAX 1040 married jointly.

[dtjardine]

Can you file separately and each take the credit?

[TomD8]

@jamesyliu1210 --

Since each spouse meets the eligibility criteria for the full exclusion on their particular home sold, per 26 US Code 121, on a joint return the allowable exclusion is the sum of the exclusions each spouse would have been entitled to if not married.  The code also states that each spouse shall be treated as owning the property during the period that either spouse owned the property.

https://www.law.cornell.edu/uscode/text/26/121

Therefore you and your wife are entitled to a total exclusion of $500K on your joint tax return.

[NCperson]

@TomD8 - while it is moot for this situation, isn't it a max of $250,000 for each spouse, since they follow the 'single' rules? 

Let's say one house had a gain of $400,000 and the other had a gain of $100,000, then the 1st house still has a taxable gain of $150,000 while the 2nd house capital gain is zero, right? 

[TomD8]

@NCperson --

Yes.  If each member of a married couple owns and occupies a separate residence and files jointly, each may exclude up to $250,000 in gain when they sell. 

[NCperson]

@TomD8 - one more time.... 

If each member of a married couple owns and occupies a separate residence and files jointly, each may exclude up to $250,000 in gain when they sell against their respective abodes.

Example: spouses jointly own two homes and each lives in a separate home; they each meet the '2 in 5 rule' for the exclusion by living in their respective house .  On the same day, H's home sells with a capital gain of $400,000 while W's sells the other home with a capital gain of $100,000.  On H's, there would still be $150,000 of taxable gain while on the 2nd home, there is no taxable gain. 

The point is that W can't use the unused capital gain exclusion to cover off the gain on H's home as that would trip the rule against using the exclusion more than once in a two year period. Hence the additional language "against their respective abodes".

[jamesyliu1210]

Thank a lot.

- I lived at Michigan home for 9 years and sold it in October 2020 and it gained $ 200,000.  Again, I and my wife's names are in property deed and we have filed jointly TAX 1040.

- My wife lived in Indiana home at the same time period and sold it in August, 2021. It also gained $200,000, Again, I and my wife's names are in property deed and we have filed jointly TAX 1040.

- So, both houses gain < 500,000.

- Qs: Can we have both home sale exclusion of gain (single residency, < $500,000 vs married jointly filed TAX, jointly ownership of the both homes} ?

[jamesyliu1210]

Tom: Thank a lot.

- I lived at Michigan home for 9 years and sold it in October 2020 and it gained $ 200,000.  Again, I and my wife's names are both in property deed and we have filed married jointly TAX return.

- My wife lived in Indiana home at the same time period and sold it in August, 2021. It also gained $200,000, Again, I and my wife's names are both in property deed and we have filed married jointly TAX return.

- So, both houses gain < 500,000, each < $250,000.

- Qs: Can we have both home sale exclusion of gain (single residency, < $500,000 vs married jointly filed return, jointly ownership of the both homes, two homes sold within 2 years} ?

[NCperson]

please read the eligibility tests in publication 523

note also the ownership test: 

Eligibility Step 2—Ownership
Determine whether you meet the ownership requirement. If you owned the home for at least 24 months (2
years) out of the last 5 years leading up to the date of sale
(date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse
has to meet the ownership requirement.

you have to fall back to the "single' rules given your circumstance as detailed on the top of page 7 on the line that discussed 'married filing jointly'... so think of yourselves as single as you go through the test of eligibility. 

under those rules and your circumstance you EACH have an exclusion of $250,000. 

And it doesn't matter in your case, but you can't EACH use the exclusion more than once in a two year period.  So if it turned out that the profit on one house was $400,000 and the profit on the other house was $100,000, then the exclusion on the $400,000 profit is $250,000 and the exclusion on the other is $100,000....you can't use the remaining $150,000 against the $400,000  profit as that would be using the exclusion twice in a two year period (let alone you didn't live in that house 2 of the last 5 years)

[jamesyliu1210]

NCperson:

Thank you so much for your reply. Very helpful and professional. Appreciate.

Still one more Q, for married jointly TAX return, only one spouse of the couple is needed to meet the ownership eligible test.

Does this apply if house deed has names of both couple and I and my wife both signed at closing document? Thanks again. James