Charlotte, NC · Member since 2014 · 26 posts · 3 votes
This question has become a little more challenging than I originally expected - CPA's & tax experts watch out!
My fiance and I each lived and owned our own homes for more than 2 years. My name was on my deed and her name on her deed. She moved in with me, rented her home out (for less than 3 years) and then we got married. We recently sold my home and according to IRS pub 523, we're ok to exclude any capital gains taxes (it's a primary residence I lived there for 2 years alone, less than $250k in gains).
Here's the catch
We want to sell her home now, but I'm not sure if we can avoid the capital gains on her home. The only reason being that we refinanced her home and I was added to her deed.
1) If we sold her home and filed taxes separately, can we exclude capital gains for both properties since they were both primary residences?
2) Can we file together and exclude capital gains for both properties?
@Peter Mikhjian you are each separate taxpayers even if you file a joint return. So you are each entitled to take a Sec 121 exclusion on your separate properties regardless of the "one Sec 121 every two years" rule.
The question is how long has your wife lived with you? She must have lived in her primary home for the past 2 of 5 years. That's the timeline you need to meet.
Another factor - don't report this yourself and instead rely on a CPA. Why? Because the way in which you report this could result in your wife's exclusion being applied to your property even though you're under $250k of gains. Then, when you go to sell your wife's old primary and use the exclusion again (more than once in two years), the IRS algorithms will pick it up and you can almost bet you'll be getting correspondence/potential audit from the IRS.