29.3 Home Sales by Married Persons

Where a married couple owned and lived in their principal residence for at least two years during the five-year period ending on the date of sale, they may claim an exclusion of up to $500,000 of gain on a joint return. Under the law, the up-to-$500,000 exclusion may be claimed on a joint return provided that during the five-year period ending on the date of sale: (1) either spouse owned the residence for at least two years, (2) both spouses lived in the house as their principal residence for at least two years, and (3) neither spouse is ineligible to claim the exclusion because an exclusion was previously claimed on a sale of a principal residence within the two-year period ending on the date of this sale. If Tests 1 and 3 are met but only one of you meets Test 2, your exclusion limit on a joint return is $250,000. However, even if the two-out-of-five-year use test is met, “nonqualified use” after 2008 may limit the exclusion you can claim; see 29.2.

Caution

Exclusion for Married Couple

For a recently married couple, the exclusion limit on a joint return is $250,000, not $500,000, where only one of the spouses has satisfied the ownership and use tests before a sale. Gain in excess of the $250,000 exclusion is reported on Form 8949 and Schedule D.

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Death of spouse before sale.

If your spouse died before the date of sale, you are considered to have owned and used the property during any period of time when your spouse owned and used it as a principal home, provided you did not remarry before the sale. This rule can enable you to satisfy the two-out-of-five-year ownership and use tests.

If you and your spouse each met the use test and one of you met the ownership test as of the date of your spouse’s death, and you sell the residence in the year he or she dies, you may use the $500,000 exclusion limit, assuming you file a joint return for the year of your spouse’s death and neither of you claimed the exclusion for another home sale in the two years before your spouse died. You are also entitled to use the $500,000 exclusion limit on a sale that is within two years of your spouse’s death, provided you and your spouse would have qualified for the $500,000 limit on a sale immediately before his or her death under Tests 1–3 at the beginning of this section.

Divorce.

If a residence is transferred to a taxpayer incident to divorce, the time during which the taxpayer’s spouse or former spouse owned the residence is added to the taxpayer’s period of ownership. If pursuant to a divorce or separation a taxpayer moves out of a home that he or she owns or jointly owns with the other spouse (or former spouse), the taxpayer who has moved out is treated as having used the home for any period that he/she retains an ownership interest in the residence while the other spouse or former spouse continues to use it as a principal residence under the terms of the divorce or separation agreement.

Separate residences.

Where a husband and wife own and live in separate residences, each spouse is entitled to a separate exclusion limit of $250,000 on the sale of his or her residence. If both residences are sold in the same year and each spouse met the ownership and use test for his or her separate residence, two exclusions may be claimed (up to $250,000 each), either on a joint return or on separate returns.