Qualify for $500,000 capital gain exemption

[chrisrichards619]

What is the name of your state? Pennsylvania

My girlfriend and I have lived together in her house for the past 9 years. We meet the "ownership" and "use" criteria and neither of us have sold another property in the past 2 years.

We are preparing to sell her house which would generate about $400,000 in profit. We want to qualify for the $500,000 exemption by getting married.

My question is regarding timeline. Do we have to be married BEFORE selling the house? Or can we sell the house in Jan 2019, get married in March 2019 and then file jointly for 2019 to avoid capital gains? Thank you in advance.

 

[Zigner]

You'd have to be married when it is sold.

 

[xylene]

You have to be married, but honestly is there a reason you have to wait to be married until March.

You can get civilly married any time you want and then have a ceremony at another time. It is totally legal, protects your rights and etc.

You could get married Dec 31 2018 and get the tax benefits for the entire 2018 tax year too.

 

[LdiJ]

What is the name of your state? Pennsylvania

My girlfriend and I have lived together in her house for the past 9 years. We meet the "ownership" and "use" criteria and neither of us have sold another property in the past 2 years.

We are preparing to sell her house which would generate about $400,000 in profit. We want to qualify for the $500,000 exemption by getting married.

My question is regarding timeline. Do we have to be married BEFORE selling the house? Or can we sell the house in Jan 2019, get married in March 2019 and then file jointly for 2019 to avoid capital gains? Thank you in advance.

My gut reaction is that you have to be married first. You have to be a married couple to get the exemption for selling the house, and if you sell it before you get married, you will never have lived in the house as a married couple. Read IRS Publication 523 thoroughly.

 

[Taxing Matters]

My question is regarding timeline. Do we have to be married BEFORE selling the house? Or can we sell the house in Jan 2019, get married in March 2019 and then file jointly for 2019 to avoid capital gains? Thank you in advance.

I understand why the gut reaction of the previous persons to reply is that you have to be married prior to the date of the sale; one would tend to think that the idea behind the rule is to provide a larger exemption for married couple selling a home. But I think that is not the case. What the law requires for the larger $500,000 gain exclusion is the following:

(2) Special rules for joint returns.--In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property--
(A) $500,000 limitation for certain joint returns.--Paragraph (1) shall be applied by substituting “$500,000” for “$250,000” if.--
(i) either spouse meets the ownership requirements of subsection (a) with respect to such property;
(ii) both spouses meet the use requirements of subsection (a) with respect to such property; and
(iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3).

(B) Other joint returns.--If such spouses do not meet the requirements of subparagraph (A), the limitation under paragraph (1) shall be the sum of the limitations under paragraph (1) to which each spouse would be entitled if such spouses had not been married. For purposes of the preceding sentence, each spouse shall be treated as owning the property during the period that either spouse owned the property.​

Internal Revenue Code (IRC) § 121(b)(2). The tax regulations simply repeat the statutory rule.

The focus of the rule is that they are taxpayers filing a joint return for the year; when they got married during the year does not factor into it. Indeed, taxpayers are eligible to file joint returns and get all the benefits of that status even if they marry on December 31 of the year. One of those benefits is the joint return rule for sales of a home under IRC § 121. The tax regulations do provide two examples that help illustrate that the focus here is not when they got married, but simply that they are eligible for and in fact file a joint return:

Example 1. Unmarried Taxpayers A and B own a house as joint owners, each owning a 50 percent interest in the house. They sell the house after owning and using it as their principal residence for 2 full years. The gain realized from the sale is $256,000. A and B are each eligible to exclude $128,000 of gain because the amount of realized gain allocable to each of them from the sale does not exceed each taxpayer's available limitation amount of $250,000.

Example 2. The facts are the same as in Example 1, except that A and B are married taxpayers who file a joint return for the taxable year of the sale. A and B are eligible to exclude the entire amount of realized gain ($256,000) from gross income because the gain realized from the sale does not exceed the limitation amount of $500,000 available to A and B as taxpayers filing a joint return.​

Trea. Reg. § 1.121-2(a)(4), examples 1 & 2 (bolding added). As you can see from what I bolded, if the taxpayers file a joint return (and of course are eligible to do that) they get the benefit of the higher limitation so long as they meet each of the tests specified in the statute that I quoted above. Whether or not they were married on the date the property was actually sold does not matter as nothing in the statute or regulations makes that a factor in qualifying for the larger exclusion.

Note too the rule in sub-paragraph (B) of the statute, that says where the rule for the $500,000 gain exclusion in (A) is not met the exclusion is the total of the exclusions each would get if they were not married — but treats each spouse as having owned the property for any time either of them owned it. Here, if you are married and filing a joint return, that still allows you to be treated as though you owned the property for the same time she owned it, and given the other facts you provided you'd still get the entire gain excluded from income.

 

[Zigner]

Thanks for the detailed correction, Taxing.

 

[LdiJ]

Thank you TaxingMatters. I was scanning the publication and waffling on it which is why I suggested that the OP read the publication thoroughly themselves. I appreciate your explanation but would probably want to do a tad more research before I could comfortably take a position on it. I simply have not found anything that specifically addresses that.

Although, I do agree that the fact that ones marital status for the tax year is ones marital status as of 12/31, therefore that would tend to back up your position. Quite frankly, I have never had this particular scenario arise.

 

[chrisrichards619]

Thank you all for the information. It sounds like the consensus is; we just need to be married / file jointly in the same calendar year that the house is sold. However, it is likely we will be married long before that - because we are in love. And you are all invited to the wedding!!

 

[HRZ]

Unless you find clarification to the contrary the safer answer is to be married slightly before the sale takes place

 

[PayrollHRGuy]

Unless you find clarification to the contrary the safer answer is to be married slightly before the sale takes place

I believe Taxing Matters gave all the clarification needed.

 

[Taxing Matters]

Although, I do agree that the fact that ones marital status for the tax year is ones marital status as of 12/31, therefore that would tend to back up your position. Quite frankly, I have never had this particular scenario arise.

I understand the reason for the discomfort since the initial reaction is that to get the higher exclusion one should be married at the time of the sale. But consider the situation where one of the couple works all year and the other does not. They marry on 12/31, and then file a joint return. They get the benefit of the married filing joint rates for all the income that year, even though all but one day of it was earned while they were single. One would intially think that cannot be, that the Code should bifurcate the tax year between time when they were single and when they were not. However, that complication is one what Congress didn't want to deal with. Of course, on average for the government it works out since the same rules apply for divorces, too: even if your divorce is final on 12/31, you are considered unmarried for the entire year, too.

So why should the income from a sale of a house be thought to be somehow different than that wage income? If Congress had wanted the date of the marriage to matter it would have said so in the statute. It didn't. It just focused on whether they are married filing a joint return for the year. That's consistent with the way it treats pretty much all the married related stuff in the income tax law. It just makes things easier to apply the rule that your status as of 12/31 is what your status is considered for the entire year.

 

[Shadowbunny]

Thank you all for the information. It sounds like the consensus is; we just need to be married / file jointly in the same calendar year that the house is sold. However, it is likely we will be married long before that - because we are in love. And you are all invited to the wedding!!

We'll be looking for the invitations in the mail!

 

[LdiJ]

I understand the reason for the discomfort since the initial reaction is that to get the higher exclusion one should be married at the time of the sale. But consider the situation where one of the couple works all year and the other does not. They marry on 12/31, and then file a joint return. They get the benefit of the married filing joint rates for all the income that year, even though all but one day of it was earned while they were single. One would intially think that cannot be, that the Code should bifurcate the tax year between time when they were single and when they were not. However, that complication is one what Congress didn't want to deal with. Of course, on average for the government it works out since the same rules apply for divorces, too: even if your divorce is final on 12/31, you are considered unmarried for the entire year, too.

So why should the income from a sale of a house be thought to be somehow different than that wage income? If Congress had wanted the date of the marriage to matter it would have said so in the statute. It didn't. It just focused on whether they are married filing a joint return for the year. That's consistent with the way it treats pretty much all the married related stuff in the income tax law. It just makes things easier to apply the rule that your status as of 12/31 is what your status is considered for the entire year.

That does make perfect sense. Although the tax code often doesn't make much sense at all...LOL.

 

[Taxing Matters]

That does make perfect sense. Although the tax code often doesn't make much sense at all...LOL.

There is a lot in the tax code that makes sense, though the logic underlying some of it is not always obvious. Some people though think that because a lot of it does have logic to it that all of it does, and that leads them into trouble. It's well worth remembering that tax law, like any other law, is whatever the Congress or state legislature says it is, and not all legislators are logical all the time. Sometimes, a rule is just there because a lobbyist convinced a legislator to put in there. Tax law in particular is subject to lots of lobbying and changes all the time. Because of that, I always double check the law in detail before giving a client an answer; relying on my memory, no matter how good it is, is asking for trouble. The rule I remember could have changed yesterday, after all.

 

[HRZ]

I stand corrected...seems if you get married in year of sale the sequence does not matter