Tax Breaks for Married Couples Selling Their Home

Michael Marz for Demand Media writes: Your home, like most of the other property you own, is treated as a capital asset by the Internal Revenue Service. Therefore, if you and your spouse sell the home at a profit, capital gains taxes would ordinarily be due. However, the law allows most people to exclude a portion of their taxable gain. For married couples who can satisfy four requirements, the tax code offers a substantial tax break by doubling the maximum gain exclusion from $250,000 to $500,000.

Joint Return Required

Of the four requirements, the joint return test is the only one that you have control over. Provided you remain legally married on the last day of the tax year that you sell the home, which for most taxpayers is Dec. 31, you can satisfy the first requirement by filing a joint return. Both of you must consent to filing jointly and sign the return.

The Ownership Test

All taxpayers, whether married or not, must pass the ownership test to take advantage of the capital gain exclusion. For married couples, however, only one of you needs to satisfy the requirement. If either of you were the legal owner of the home for at least two of the five years immediately prior to the sale, the test is satisfied.

The Use Test

Satisfying the use test requires that you both lived in the home for at least two of the same five years just before the sale. During those two years, however, you and your spouse must have used it as your main home. Whether it's a house, mobile home, houseboat, cooperative apartment or condo – they're all eligible to be a main home. If you had multiple residences, your main home is generally the address closest to your jobs, is where you receive mail, is listed on your tax returns and is where your car is registered, for example. The two years of use don't have to be consecutive or cover the same two years used for the ownership test.

Prior Gain Exclusion

The final requirement for being able to exclude the gain from the sale of your home from your tax return is that neither you nor your spouse excluded the gain from a different home during the past two years. If this condition can't be satisfied, you may still be eligible to exclude $250,000 of gain if the prior home sale was done by your spouse and you can satisfy all four requirements on your own.

Gain Calculation

If you made a substantial profit on the home sale, you may want to calculate the precise amount of the gain to see if the $500,000 exclusion will cover all of it. First, you'll subtract all selling expenses from the sales price. Selling expenses typically include commissions, the cost of advertising the home, legal fees and loan charges or placement fees you pay. From this amount you subtract your cost basis in the home to arrive at your capital gain. The cost basis of a home is ordinarily the price you purchased it for plus the cost of any permanent home improvements you made.