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In May, 1999 I got married and in July, 1999 sold my wifes house for approx $10,000 gain. She had owned the house for exactly two years at the time of the sale. It was her primary residence for the 22 months before we got married and was left vacant for two months so we could get the two year exclusion.

In addition, we are planning to sell our current house next year in Mar-Apr of 2001 for an estimated gain of $50,000. This house has been my primary residence for three years.

1. Are we eligible for the home sale exclusion on her house on '99 taxes?

Probably. However, there may be an argument available to the IRS that the two months of vacancy meant the house wasn't her principal residence during that time, therefore she fails the residency test. Just being very conservative here.

2. If so, will we be eligible for the home sale exclusion on our current house on 2001 taxes even though we sell it less than two years after we sold her house?

No - if you sell less than two years after the sale of your wife's home. The exclusion is available only once in a two year period.

3. If not, I see my only options are:
- Wait till after July, 2001 to sell our current house
- Claim the $10,000 gains from my wifes house on '99 taxes.
Are there any other options?

I'd personally go for delaying the sale a couple of months. There may be some odd possibilities available because you didn't meet the residence or ownership tests on your wife's house, and she won't meet the tests on your current home if you sell less than two years after she moved in with you (but you would meet them assuming you lived there before the wedding). I'm not sure there really is anything available for this situation, just my thoughts to help the more creative types in their thinking.


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