I sold a home 1.5 years ago and claimed capital gains exemption while filing jointly. Can my wife or I claim it again now if we file as married filing separately?

[josefmyers267]

I purchased the first home before getting married so only my name was on the deed/loan. The total capital gains on the sale of both properties combined will be less than 250k. We have both lived in the current home we would like to sell for over 2 years.

[DaveF1006]

It depends. If I understand you correctly, you already claimed the capital gains exclusion in the year you sold the home. If this is true,  then you cannot reclaim it in a following year when your filing status changed..

Now if you amend your original return in the year you sold the home changing your filing status from Married Filing Jointly to Married Filing Separately, then you are permitted to do that if you meet the ownership and use test outlined in the following link. If this is the case, you can each exclude up to $250,000 each.

There are exceptions to the eligibility tests where you can qualify for the exclusion. Please review IRS publication 523 at the following link for a list of these exceptions.

If you need to amend, please refer to the following Turbo Tax article that summarizes the amendment process.

[Critter-3]

One big flaw in that thinking ... you cannot amend a return to go from MFJ  to MFS  after the filing deadline. 

[Opus 17]

I think the other answers missed the point of the question. 

It sounds like you want to sell house #2 in 2022.  House #2 is jointly owned and lived in for more than 2 years, but you used your personal $250,000 exclusion less than 2 years ago on house #1.   

I believe the answer is yes: if you and your spouse file separately in 2022, your spouse can use their individual $250,000 exclusion.  However, there are a number of potential issues with this.  

First, if you are in a community property state, each of you must report half the sale and half the gain.  You will pay tax on your half even if your spouse uses their exclusion on their half.  Even if you are not in a community property state, you should probably each report half the sale and half the gain, but I can’t cite a regulation one way or the other.  

Second, filing MFS could negatively impact many other tax provisions such as IRA contributions and the child care credit just for starts.  When filing MFS, if one spouse itemized deductions on schedule A then both spouses must itemize even if the itemized deductions are zero.  You can’t stack the itemized deductions on one spouse and have the other spouse take the standard deduction.  

Regarding amending your prior tax return, if your gain on the current home is larger than the gain you excluded in 2020 on home #1, you could file an amended 2020 return to pay tax on the gain, then you could file jointly in 2022 and claim the full exclusion on the sale of home #2.  It would not be necessary to change your filing status on your amended 2020 return, you still file jointly but list the home sale and pay the capital gains tax.  

[Mike9241]

i can see a possible issue with the MFS option.   if on the first home sale would they have been eligible for the max joint return exclusion of $500K even though it was not needed? 

Reg 1.121-2(a) 

(2) Joint owners. If taxpayers jointly own a principal residence but file separate returns, each taxpayer may exclude from gross income up to $250,000 of gain that is attributable to each taxpayer's interest in the property, if the requirements of section 121 have otherwise been met.

if yes would the spouse be deemed to have made a previous sale within 2 years thus denying her the right to take the max exclusion

one thing they didn't mention is the reason for the sale.  they both might qualify for a partial exclusion if the sale is for a job change, health, or unforeseen circumstances. 

I think it would be wise for them to use a professional to go through the various possibilities to produce the lowest tax.  Turbotax offers return preparation by a tax pro or they could use an independent tax pro

[Opus 17]

@Mike9241 

I thought about your complication, but I think it will not be an issue. If the home was owned solely by spouse #1 before the marriage, then spouse #2 would not have even qualified to use their exclusion unless they had resided in the home at least two years. If the gain on the home was less than $250,000, then it could also have been excluded by spouse #1 alone. This gives two arguments that the taxpayers could use if the IRS were to contact them regarding the exclusion on house number two.  The IRS won’t even know about the gain on house number one or house number two unless a 1099-S was issued at the closing.

[Mike9241]

I disagree since i interpret this part of section 121 to imply that the spouse is also deemed to own the house.  

this provision allows a married couple to claim a $500,000 exclusion even if only one is on the title.

if this weren't the case then wouldn't it be possible for H to sell a house only he owns and W to sell a house 

only she owns and claim $500,000 on both even though they're both sold the same year. 
(1)Joint returns
If a husband and wife make a joint return for the taxable year of the sale or exchange of the property, subsections (a) and (c) shall apply if either spouse meets the ownership and use requirements of subsection (a) with respect to such property.

more important, I think their situation is complicated that they should get pro advice. for example, they may qualify for under one of the partial exclusion exceptions which then might allow joint filing and with no need to amend the prior return to eliminate the claimed exclusion which will not only cost them taxes but penalties and interest.

[josefmyers267]

Thank you for all the helpful responses!

Here are a few more details regarding our current situation that may help. @Opus 17 @Mike9241 @DaveF1006

All homes in question are in Florida, a non-community property state. Home #1 was purchased in June 2016 by H. Marriage between H and W occurred in June 2018, so from 2018 and forward, taxes were MFJ. Home #2 was purchased in December 2019 by both H and W. Both H and W moved into Home #2 in January 2020. Home #1 was sold in May 2020 with total gains around 60k. No capital gains were paid as this was less than either the 250k for single/500k for married limits on the exclusion. 

H and W would like to sell Home #2 in February 2022, with an estimated gain of 100k. In this instance, can the exemption be claimed with no issues while still filing jointly, even though the time between the two sales will be less than 2 years?

[DaveF1006]

It depends. According to the IRS, the look-back requirement states that if you didn't sell another home during the 2-year period before the date of sale you meet the look-back requirement. in your case however, if you sell the home in February of 2022, you will not be able to exclude your home from capital gains.  

My suggestion is to wait until May of 2022 to sell your home. Please look at the look-back requirement in the following IRS publication for further details under Eligibility Step 4—Look-Back. 

I mentioned in my earlier post that you can amend a return by changing your filing status from Married Filing Jointly to Married Filing Separately. Critter3 is correct stating that this cannot be done once the return has been electronically filed with the IRS. I just wanted to clarify this point. 

[ Edited 12/29/21| 11:40 AM PST]

@josefmyers267