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Author: rams016 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121103  
Subject: Sale of House Date: 3/16/2010 1:11 PM
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My husband purchased a house in 1997 as his primary residence (we were not married at the time). We got married in November 2005 and he continued to live in his house until June 2006. I continued to live in my own house in nearby town during this time. He rented his house from June 2006 through December 2008. Improvements were made to the home in 2009 and it was sold May 15, 2009.

My question is, can we exclude the gains from the sale of the house on our taxes? Technically, I believe that May 14 2004 through June 2006 would qualify as the two years as a primary residence but does it matter that it was not my primary residence (only his) since we were married during that time? We have filed Jointly since we've been married.
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 109621 of 121103
Subject: Re: Sale of House Date: 3/16/2010 1:50 PM
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To qualify for the exclusion under IRC 121, you need to own the house for two out of the 5 years before the sale and you need to have used the house as your principal residence for 2 out of the 5 years before the sale.

The house was sold on 5/15/09, so the relevant 5 year period is 5/15/04 through 5/15/09. Your husband use the house as his principal residence from 1997 until June 2006. So for the two years from 5/15/04 to 5/15/06, it was his principal residence. And he has owned the house for the entire time. So he meets the tests and may exclude up to $250k of gain.

On the other hand, it appears that you never used this house as a principal residence. So you do not qualify for any exclusion.

On a joint return (or on his separate return) he could claim up to a $250k exclusion.

--Peter

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 109623 of 121103
Subject: Re: Sale of House Date: 3/16/2010 2:59 PM
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He rented his house from June 2006 through December 2008.

An addendum to Peter's response.

Not all of the gain is excludable, even if it's less than $250,000. There's a recapture of the depreciation allowed or allowable during the rental period. This is taxed as ordinary income with the rate capped at 25%.

See Publication 523, then hire someone to do your 2009 return. It's cheaper than divorce.

Phil
Rule Your Retirement Home Fool

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 109624 of 121103
Subject: Re: Sale of House Date: 3/16/2010 3:25 PM
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Not all of the gain is excludable, even if it's less than $250,000. There's a recapture of the depreciation allowed or allowable during the rental period.

Good point.

And now that I'm thinking straight (I could blame that on finally being awake after that refreshing 4 hour nap last night), one might be tempted to consider that the rental is non-qualified use for the rental period after 12/31/08. And non-qualified use causes you to pay tax on some of your gain even when you meet the other requirements to exclude gain under IRC 121.

However tempting that might be, don't do it. Rental periods AFTER using the house as your principal residence don't fall into this new definition of non-qualified use.

So there is no non-qualified use in this case.

--Peter <== who is thinking there are way too many double negatives when you have to talk about non-qualified use.

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