Capital Gains on the sale of a house

[stephmore]

I have a couple who have lived together for over 10 years. One owns the house that was sold May 2018. They got married in September 2018. They will be filing Married Filing Joint. What is their maximum exclusion limit for the sale of the house? $250,000 or $500,000

[Maude Lebowski]

[terryats]

$250,000 because spouse will not meet the residence test. pub 523 states if MFJ.

Both spouses meet the residence and look-back requirements and one or both spouses meet the ownership requirement"

[AZUKHiker]

$250,000 because spouse will not meet the residence test. pub 523 states if MFJ.

Both spouses meet the residence and look-back requirements and one or both spouses meet the ownership requirement"

But OP says they lived together for 10 years so they both pass the residence test.

[ttbtaxes]

IRC 121(d)(1) provides that only one spouse has to meet the ownership test. IRC 121(b)(2)(A)(ii) provides that both spouses have to meet the use test.

[Gene V]

I think they would only get the $250,000 exclusion--since he sold the house before they got married. If he sold the house after they got married--then they pass all the test for the $500,000.

[Maude Lebowski]

I agree with Gene V. They weren't spouses when the house was sold.

[New York Enrolled Agent]

I agree with Gene V. They weren't spouses when the house was sold.

It's an interesting question and Gene may well be correct but the regulations perhaps permit the $500K. The requirement suggests they must file a joint return for that year - doesn't state they must have been married when they sold it. Based on the original post, it seems they qualify for ownership and use. Not sure but here's the relevant regulation for §121.

(3) Special rules for joint returns --

(i) In general. A husband and wife who make a joint return for the year of the sale or exchange of a principal residence may exclude up to $500,000 of gain if--

(A) Either spouse meets the 2-year ownership requirements of Section 1.121-1(a) and (c);
(B) Both spouses meet the 2-year use requirements of Section 1.121-1(a) and (c); and
(C) Neither spouse excluded gain from a prior sale or exchange of property under section 121 within the last 2 years (as determined under paragraph (b) of this section).

[Gene V]

It's an interesting question and Gene may well be correct but the regulations perhaps permit the $500K. The requirement suggests they must file a joint return for that year - doesn't state they must have been married when they sold it. Based on the original post, it seems they qualify for ownership and use. Not sure but here's the relevant regulation for §121.

(3) Special rules for joint returns --

(i) In general. A husband and wife who make a joint return for the year of the sale or exchange of a principal residence may exclude up to $500,000 of gain if--

(A) Either spouse meets the 2-year ownership requirements of Section 1.121-1(a) and (c);
(B) Both spouses meet the 2-year use requirements of Section 1.121-1(a) and (c); and
(C) Neither spouse excluded gain from a prior sale or exchange of property under section 121 within the last 2 years (as determined under paragraph (b) of this section).

Looking at the surface, you would think they only would get the $250,000, however, looking a little deeper, like New York EA pointed out, I now think they would get the $500,000.