Primary House Tax Break

Wife’s name isn’t on the deed. Can they still enjoy the full $500,000 primary house tax break?

Q: I have a question about the primary residence tax break. I am selling my primary home in Chicago that I’ve owned for about 30 years. I owned another property in another state and we are downsizing to live there in our retirement years.

My wife and I have been married for 15 years and her name is not on the deed to the home in Chicago. I thought that you were allowed a $250,000 exemption on capital gain for a single person and $500,000 for a married couple. Not sure if that is still true. I certainly do stand to profit more than $250,000 on this property since it has appreciated in the course of 30 years.

My main question is, does my wife’s name have to be on the deed in order to qualify for the $500,000 primary house exemption to not pay capital gains?

How Do I Avoid Capital Gains Tax for Jointly Owned Property?

A: Well, we have good news for you. You only need to be married to get the full primary house tax break. The Internal Revenue Service’s (IRS) rules allow homeowners that have owned their primary residence for two out of the last five years to exclude from federal taxes up to $250,000 in profits for a single person or $500,000 for married couples.

Publication 523 on the IRS website gives examples of how you can qualify for the exclusion and what might trip you up. The IRS rules specifically state that only one spouse has to meet the ownership requirement for you to qualify for the full exclusion.

For our readers who are not familiar with the exclusion, or who haven’t sold in the past 20 years, here’s a short primer. Let’s say you and your spouse (or two non-married individuals) purchased a home before the pandemic for $200,000. And, used it as your primary residence. Now, homes in your area are selling for $700,000. If you decide to sell, the IRS would allow you to sell the home and pay no taxes to the federal government on that sale. (There may be state tax to pay.)

Calculating Capital Gains

That’s a lot of cash to pocket without paying federal taxes. Computing the profit is only slightly more complicated: You need to know what you paid for the home, what you may have put into the home that allows you to add to the basis of the home, what it costs you to sell the home and the sales price.

IRS Publication 523 includes a worksheet you can use. It walks you through which expenses and other costs that you can include in your computation to determine your profit from the sale of the home. We know that for most of our readers, the $250,000 exclusion for a single person or $500,000 for a couple will be more than enough to cover all profits from the sale of a home.

Of course, some parts of the country have seen home prices skyrocket over the past decade. If you live in Boise, or Sherman oaks, California, you might have a profit that far exceeds $500,000. If you’re that lucky, and you need to sell, you should take a close look at the IRS publication to see what you are allowed to include as you calculate your property’s basis.

One last item may be important to some readers. If you owned this home and your spouse owned a different home, be careful. Make sure that each of you will qualify for the full home sale exclusion.

Sell Without Paying Capital Gains Tax?

Let’s say you and your spouse owned homes before you got married. And, one of you sold their home a year ago. And let’s say that spouse used the home sale exclusion to avoid paying tax on some of the profit. Thatsame spouse must wait another 12 months before taking the home exclusion. That’s because you can only take the exclusion once every two years. And you and your spouse must meet all of the qualifying conditions to get the exclusion for each home sold.

Each owner must have lived in the home as their primary residence for at least two out of the last five years. If you meet that rule, that’s great. Be sure to verify with your tax preparer any other items that may be specific to your issue. For example, vacation homes are not eligible for the tax exclusion. They are not primary residences. Rental properties are also not eligible.