Two-of-five provisions may be more flexible than you know
Dear Mr. Priest: I own two homes. Each home has been my primary residence for more than two of the last five years. I am selling the first home and want to sell the second home as well. I recently have been married and want to know if my wife and I can take advantage of the $500,000 capital gains exclusion on both homes.
– Scott, Silverthorne
Dear Scott: I have good news and bad news. First, the good news: Yes, you may be able to take advantage of the capital gains exclusion for the sale of both homes. Now the bad news: You must wait at least two years after the sale of the first home to qualify for the exclusion on the sale of the second home. Furthermore, you mentioned you have been married recently. Your wife must be able to qualify under the rules to be included in the capital gain exclusion on your personal residence. In other words, each person can use a $250,000 capital gains exclusion on their primary residence if certain conditions are met. For a married couple filing jointly, the total is $500,000 ($250,000 x two persons). Those conditions include owning the home and living in the home for a total period of two out of the past five years. Just because you are now married does not automatically include your wife in this exclusion allowance. She still must qualify under the conditions of the provisions in the IRS code. However, if you have less than $250,000 in capital gains upon the sale of either home, this is a moot point since you won’t need to utilize the maximum exclusion amount.
Here’s an interesting twist many people don’t realize: Even if you haven’t lived in your home for two of the past five years, you may still qualify for part of the capital gain exclusion upon the sale of your home. First of all, realize that the two-year period is aggregate, not consecutive. If you lived in the home for six months a year during a four-year period, the total aggregate time still would be equal to two years and thus count under the two-of-five provision. Even temporary absences may qualify.
Second, if you are forced to move from your home because of hardship, you still may qualify for a pro-rated part of the exclusion. Hardship can include situations such as a change in employment, health, or unforeseen circumstances. In these cases it may be possible to use an exclusion amount equal to the proportion of time you did spend living in your home. For example, if you lived in your home for one of the past five years and are forced to move because of a change in employment, you may qualify for 50 percent of the capital gains exclusion amount. In this case, you could be entitled to use a capital gain exclusion of $125,000 to $250,000 depending on your marital status. Of course, when making tax-related decisions regarding your particular situation, always consult a qualified tax advisor first.
Bob Priest, MBA, CFP, is an independent certified financial planner and registered investment advisor serving Summit, Eagle, and Front Range residents. Bob Priest Financial, Inc. specializes in tax-advantaged investments, asset management, and fee-based financial planning. He can be reached at (970) 513-7077 or visit his Web site at http://www.BobPriestFinancial.com. All opinions herein are those of the author and not that of the Summit Daily News or its staff. Submit your financial questions to Bob@FinancialCompanies.com.
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