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Posted by Stuart A. Bronstein on January 23, 2007, 2:23 am
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An interesting question has come up. We've been doing a lot
of talking about the section 121 exclusion. But this is a
refinement we hadn't gotten to.
A couple lived together in a house owned by one of them, for
five years. Then they sold. After the sale but before the
end of the year, they marry.
How much of an exclusion do they get?
By my reading of the statute, as long as they qualify to
file a MFJ return, and they both lived there for two years
out of five, they qualify for $500,000.
I checked the regulations, but found nothing in there. In
Publication 523 it says,
"You can exclude up to $500,000 of the gain on the sale of
your main home if all of the following are true.
"You are married and file a joint return for the year.
"Either you or your spouse meets the ownership test.
"Both you and your spouse meet the use test.
"During the 2-year period ending on the date of the sale,
neither you nor your spouse excluded gain from the sale of
another home."
There's noting there to say that they have to be married on
the date of sale, only at the end of the tax year to qualify
to file a joint return.
What do you think?
Stu
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Posted by Missy on January 24, 2007, 2:34 am
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Stuart A. Bronstein wrote:
> An interesting question has come up. We've been doing a lot
> of talking about the section 121 exclusion. But this is a
> refinement we hadn't gotten to.
>
> A couple lived together in a house owned by one of them, for
> five years. Then they sold. After the sale but before the
> end of the year, they marry.
>
> How much of an exclusion do they get?
>
> By my reading of the statute, as long as they qualify to
> file a MFJ return, and they both lived there for two years
> out of five, they qualify for $500,000.
>
> I checked the regulations, but found nothing in there. In
> Publication 523 it says,
>
> "You can exclude up to $500,000 of the gain on the sale of
> your main home if all of the following are true.
>
> "You are married and file a joint return for the year.
>
> "Either you or your spouse meets the ownership test.
>
> "Both you and your spouse meet the use test.
>
> "During the 2-year period ending on the date of the sale,
> neither you nor your spouse excluded gain from the sale of
> another home."
>
> There's noting there to say that they have to be married on
> the date of sale, only at the end of the tax year to qualify
> to file a joint return.
>
> What do you think?
Stu, This exact question came up this year when my husband's
sister was going to sell and had been living with bf for
over 20 years. I went to 2 CPAs after reading the rules
myself and none of us came up with an objection. She sold
the house in April and they married in October. I was the
matron of honor. And a good time was had by all.
Missy Doyle
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<< The foregoing was not intended or written to be used, >>
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<< to this newsgroup as well as our anti-spamming policy >>
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Posted by Bill Brown on January 24, 2007, 2:34 am
Please log in for more thread options Stuart A. Bronstein wrote:
> What do you think?
I think your analysis is correct. The couple only have to be
married on the last day of the tax year of sale but not on
the sale date itself.
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
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Posted by Shyster1040 on January 24, 2007, 2:34 am
Please log in for more thread options Sounds like a reasonable interpretation of the statute. The
regulations appear to confirm your interpretation, see
Treas. Reg. 1.121-2(a)(3), which states that "a husband and
wife who make a joint return for the year of the sale or
exchange" may exclude up to $500,000 of gain if (A) EITHER
spouse meets the 2-year ownership requirement, (B) both
spouses meet the 2-year use requirement, and (C) neither
spouse excluded gain from a prior sale or exchange of
property under sec. 121 within the last 2 years (emphasis
added).
The Federal Tax Coordinator service from RIA takes the same
position, stating "Apparently, the use of the residence need
not have occurred while the spouses were married." See FTC
Para. I-4536 (RIA)(2007).
Your interpretation only makes sense in light of the overall
effect of filing a joint return, under which one spouse is
in effect taxed on a portion of the income derived by the
other spouse, regardless of whether the spouses were married
at the time that a particular item of income was derived.
If your interpretation did not apply, and assuming that the
gain on the sale of the residence was $450,000, then only
the husband could claim the gain exclusion, and then only up
to $250,000, with the result that the joint return would
include $200,000 of gain from the sale of the residence, as
to which the wife would effectively be taxed on $100,000
(technically she's subject to tax on the whole $200,000
because of joint and several liability). As a result, wife
would be taxed on gain from a house she actually used as a
principal residence for the qualifying period, without
giving her the opportunity to exclude that gain upon sale.
Since the joint return rules apply an all or nothing
approach to items of income derived by either spouse,
regardless of the marital status at the time such item is
derived, it only makes sense to apply that approach to Sec.
121 in the absence of an explicit rule to the contrary.
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by A.G. Kalman on January 24, 2007, 2:34 am
Please log in for more thread options Stuart A. Bronstein wrote:
> An interesting question has come up. We've been doing a lot
> of talking about the section 121 exclusion. But this is a
> refinement we hadn't gotten to.
>
> A couple lived together in a house owned by one of them, for
> five years. Then they sold. After the sale but before the
> end of the year, they marry.
>
> How much of an exclusion do they get?
>
> By my reading of the statute, as long as they qualify to
> file a MFJ return, and they both lived there for two years
> out of five, they qualify for $500,000.
>
> I checked the regulations, but found nothing in there. In
> Publication 523 it says,
>
> "You can exclude up to $500,000 of the gain on the sale of
> your main home if all of the following are true.
>
> "You are married and file a joint return for the year.
>
> "Either you or your spouse meets the ownership test.
>
> "Both you and your spouse meet the use test.
>
> "During the 2-year period ending on the date of the sale,
> neither you nor your spouse excluded gain from the sale of
> another home."
>
> There's noting there to say that they have to be married on
> the date of sale, only at the end of the tax year to qualify
> to file a joint return.
>
> What do you think?
Tax law says that you make the determination on marital
status as of 12/31 of the tax year. Unless the code (it
doesn't) specifically requires a married couple to be
married on the date of sale to avail themselves of the
$500,000 joint return exclusion, then they meet the
ownership requirement. The regulations merely require that a
joint return be filed for the year of sale and that at least
one of the two joint filers meet the ownership test. See REG
1.121-2.
--
Alan
http://taxtopics.net
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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