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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: Home sales after marriage Date: 3/7/2000 11:11 AM
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<<My fiance and I each own a home, and we've each lived in our respective homes for over two years. Both homes have appreciated in value since we bought them, but by less than $250,000 each.>>

Boy oh BOY!!! Do you have some potential tax savings moves available to YOU!!!

<< We plan to marry in January 2001. AFTER we've married, my fiance plans to sell his house and move into my house (in early 2001). In early-to-mid 2002, we plan to sell my house and buy a larger house together (need room for the hoped-for family! :-) ).>>

That would work.

<<My question is, will we be able to use the $250,000 exclusion from capital gains for the sale of his home in 2001 AND the $250,000 exclusion from capital gains for the sale of my home in 2002?>>

Yup...seems too good to be true, eh? But it IS true. From what you are telling me, you have (or will have) met the ownership and use rules. The only problem is that for the sale of his home, the maximum exclusion will be only $250k (even though you sell after you are married and will file a joint return). The maximum exclusion on the second home sold may or may not be greater than $250k, depending upon the ownership and use rules. You can read more about these issues in my multi-part article on the exclusion on gain on a principal residence in the Taxes FAQ area.

<< Or, will we have to pay capital gains tax on the gains from the sale of one of those homes?>>

Not that I can see based upon the information that you've provided.

<<(I ask this because the IRS examples in their instructions for the home sales form refer to home sales BEFORE two individuals marry, not AFTER they marry, so I'm not clear on whether we'll be able to take both exclusions.)>>

And I'm not sure what you are reading. In the old days (with the "once in a lifetime" exclusion), it would have been important to sell BOTH of the properties prior to marriage. Under the new rules, it's not nearly as important.

What you are reading may be driving at the fact that you only receive this benefit once every two years. But it's clear (at least to me) that you would both qualify for the exclusion...but the exclusion might be limited to only $250k on each property.

The ownership and frequency rules (at least in your case) would only really be important if one of the properties had a gain GREATER than $250k...or you think that the 2nd home to be sold will have a gain greater than $250k at the time you sell it. If that is the case, then careful planning is required.

But if you don't see either property as having more than a $250k gain on the sale, the fact that your future husband will be possibly tainted (because of a prior sale within two years) will not impact YOUR $250k gain on the sale of the 2nd property.

You must remember that if either spouse doesn not meet the use and frequency tests, the allowable exclusion is limited to the sum of the amounts that each spouse would be qualified to exclude if they had not been married. Unlike the old rules, if one spouse "fails" the test, it doesn not bar the other spouse from excluding gain.

Again, you might want to read the article in the FAQ for additional information.

TMF Taxes
Roy
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