Capital gains tax exemption for residence if recently married

8 Replies

My primary residence is worth almost 3x as much as what I paid for it in 2013.  I'm planning on selling in 2018 for a number of reasons, but the increase is going to leave me with a gain of around $300k.   I'm not married and therefore only $250k of that gain would be exempt from capital gains tax.  It's a good problem to have -- but I'm wondering if I can avoid it entirely.

I've been with my partner for going on 13 years, and we've intended on getting married for a long time, but just haven't really gotten around to it.  (Yes, I realize that sounds like a weak reason as I type it -- but neither of us ever wanted a wedding and being married wouldn't change much for us beyond tax filing status, so it wasn't a high priority on our list.  Going to a county courthouse is kind of like going to the DMV -- we don't want to go unless we absolutely have to.)  In hindsight, I realize taking care of this ages ago would've entirely negated this problem -- but hindsight is 20/20. 

So here's my question:  If we get married now and transfer title to the residence to both of our names, would we need to wait for him to be on title for 2 years in order to get the $500k exemption for a married couple?  If so, are there any exceptions that would shorten the period? Any arguments to be made to the IRS since he's lived here the entire time I have?   Thanks for any input! 

@Raquel Doheny you're such a romantic!  :)

Great question, though. The IRS requirement for the Section 121 Exclusion is 2-fold:

1. Must have lived in the home for 2 of the 5 years prior to the sale.

2. Must be an owner on the property for 2 of the 5 years prior to the sale.

You can get an exception (and a pro-rated maximum exclusion) if the sale was because of a work-related move. Or for health or other 'unforseen' circumstances (triplets!?!). And, not to be too morbid, but if he died before he was an owner for 2 years, you would be able to claim the married ($500,000) exclusion amount for up to 2 years after his death.

The tax will be $10k or less, depending on your income.

Maybe one of the tax guys can chime in but dont you get to deduct sales expenses and improvement costs from that gain? That reduces it. As for getting married that really isnt a business decision, it is something you want to do or not. I know people who have gotten officially married after 30 years together because that was when they got to that place in thier life. Thier kids didnt even know. If you both want to get married know it is more then this one transaction you are tied together for.

Hi @Raquel Doheny Congratulations on the increased value of your house. Comparing to the 13 years relationship, the tax applicability is very easy. :)

1. If you get married and file joint return you will be able to exclude full $500k, assuming that your partner has lived in the house for 2 out of 5 years preceding the sale, and neither of you had another exclusion on sale of a house in the previous 2 years. 

2. You DO NOT have to wait two years after getting married to get full exemption, as long as both of you lived in the house for 2 years.

3. You DO NOT have to transfer ownership, you can be the only owner. 

To sum up, you can get married today at noon, and sell the house right after the justice of the peace pronounce you man and wife. :)

Feel free to reach out with any questions. I would be happy to help.

@Vlad K. Thank you for the clearly laid out answer!  He has never owned a property and has lived here with me the entire time, so it sounds like we meet the criteria!  It's nice when tax answers can be made so succinctly :) 

@Paul Allen  I did find a lot about this 2-fold requirement when searching the web, but your comment helpfully guided me to what I really needed!  I just read the Section 121 Exclusion, and per (b)(2) (A)(1): if "either spouse meets the ownership requirements of subsection (a) with respect to such property" (emphasis added) -- with subsection (a) referring to the rule regarding residency requirements -- then the $250,000 exclusion would be replaced with $500,000.  

Also under subsection (d) special rules, per (A): 

"Property transferred to individual from spouse or former spouse In the case of an individual holding property  transferred to such individual in a transaction described in section 1041(a), the period such individual owns such property shall include the period the transferor owned the property."  

Section 1041(a) refers to interspousal transfers -- so if I'm reading this correctly, if I transferred an interest in my property to my spouse, the period he owns the property would be considered the same as the period I held the property (as the transferor).  Of course there are a lot of exceptions that would make this inapplicable -- but it looks like we'd meet all of the qualifications.  So yay!

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Originally posted by @Raquel Doheny :

@Vlad K. Thank you for the clearly laid out answer!  He has never owned a property and has lived here with me the entire time, so it sounds like we meet the criteria!  It's nice when tax answers can be made so succinctly :) 

 Good morning Raquel. You are very welcome! Feel free to reach out any time, I would be happy to help you.

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