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Question:
Can married taxpayers qualify for the exclusion from
gross income of the gain from the sale of a principal residence, when one
of the taxpayers is a resident of one state and the spouse is a resident
of another state?
Answer:
The answer is the exclusion would apply to both residences provided certain criteria are met as described below.
In general, gross income shall not include the gain from the sale or exchange of property if during a 5-year period ending on the date of the sale or exchange such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more. The amount of gain excluded from gross income with respect to any sale or exchange shall not exceed $250,000. The exclusion is available only once in a 2-year period.
There are special rules for joint returns. In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property the exclusion amount limitation is increased to $500,000 if the following:
(1) either spouse meets the ownership requirements
(2 years);
(2) both spouses meet the use requirements (2
years); and
(3) neither spouse is ineligible for exclusion,
because during the 2-year period ending on the sale or exchange, there
was another sale or exchange.
Per the rules in the above paragraph the $500,000 limitation would not apply due to the failure to meeting the use requirement described in (2), but the $250,000 limitation would be available for each spouse. IRC Section 121(b)(2) (B) states that if such spouses do not meet the requirements of the above paragraph, the limitation shall be the sum of the limitations to which each spouse would be entitled if such spouses had not been married. More simply, if the taxpayer sold his principal residence in one state and met the 2-year ownership and use requirements during a 5-year period ending on the date of the sale of his principal residence, the sale would qualify for the exclusion of $250,000 of gain from gross income. The $250,000 exclusion would also apply if the spouse sold the residence in the other state. Also since the taxpayer and spouse would not qualify for the special rules for joint returns ($500,000 limitation), the taxpayer and the spouse, each would have the $250,000 exclusion available in a 2-year period, instead of a one sale limit in a 2-year period.
In order for a house to be considered a principal
residence, it must be physically occupied a majority of the year and consideration
should be given to other residency factors such as location of business,
voter registration, vehicle registration, drivers license, and state returns
in the state and town where residency is being claimed. This would apply
to each individual.
(1) For home sales less than the $250,000
there is no reporting requirement (ie. 1099-S) if the real estate reporting
person receives written assurance in a form acceptable to the Secretary
of the Treasury that: (1) such residence is the principal residence; (2)
that there is no federally subsidized mortgage on the property; and (3)
the full amount of gain is excludible from gross income under the exclusion
rules.
(2) Basis in a house built by either the taxpayer or spouse will not include the value of their own labor or the value of any other labor they did not pay for.
(3) Any deferred rollover gains. The fact that the law changed does not give the taxpayer a fresh start if there are any deferred rollover gains in one of your current principal residences. This deferred gain under the old law would reduce their basis in the principal residence.
(4) The Internal Revenue Code and other sources are not very clear on where the Form 1040 should be filed in the case of two principal residences. The code merely states the return should be filed in the district in which is located the legal residence or principal place of business of the person making the return. I would recommend filing the return in alternating IRS districts, depending on the states of residence, except in years when a residence is sold, file in the district of the sale.
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