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arushi_13
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Joined: 09 Feb 2008
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Posts: 1235

Posted: 08 Jul 2009 at 12:39 \| IP Logged

For MFJ couples to qualify for the $500,000 gain exclusion from selling their primary home, each of them needs to meet the USE test but either of them can meet the OWNERSHIP test.

What happens when one of them ONLY meets the use test? Is the deduction limited to 250k gain exclusion i.e. available to the spouse who meets both tests even though the couple is doing MFJ?

Thanks for your help.

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caixinran
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Joined: 10 Jun 2009
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Posted: 08 Jul 2009 at 14:20 \| IP Logged

A husband and wife who file a joint return may exclude up
to $500,000 of the gain if:

1) Either spouse meets the two-year ownership
requirement.

2) BOTH spouses meet the two-year use
requirement.

3) Neither spouse excluded gain from a prior sale or
exchange of a principal residence within the last two
years.

-------Also found this on IRS ------------

Reduced Exclusion:

Taxpayers who sell their principal residence but don’t
meet the ownership and use requirements, or who sell
their home within two years of selling another home, may
be eligible for a reduced exclusion. The reduced
exclusion is available if a change in place of
employment, health or unforeseen circumstances
necessitated the sale.

CPAs would calculate the reduced exclusion by multiplying
the maximum dollar limitation ($250,000 or $500,000 for
qualifying married taxpayers) by a fraction. The
numerator of the fraction is the shortest of (1) the time
the taxpayer owned the home during the five-year period
ending on the date of the home’s sale, (2) the time the
taxpayer used the home during the five-year period ending
on the date of sale or (3) the time between the date of
the prior sale for which gain was excluded and the date
of the current sale. The numerator and denominator are
expressed in either days or months. If the measure is
days, the denominator is 730 days (365 days X 2 years).
If the measure is months, the denominator is 24 months.

----------------- End of Reference ------------

Then, If only one spouse passed the 2 years out of 5 use
test. and either spouse passed the ownership test.

For that Passed Spouse, He is in title of full $250,000
exclusion.

For the Non-passed Spouse (2 years Use test), She may be
qualify for a reduced exclusion by using the month use
divided by 24 months. Then times $250,000.

(If she only use it for 14 months, and the sale of the
residence is due to a change in place of employment,
health or unforeseen circumstances)

calculated as 14/24 x 250,000 = $145,833

Then total exclusion on the MFJ returns will be $250,000
+ $145,833 = $395,833

Please correct me if I am wrong.

Thanks and good luck to all of us!

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arushi_13
Major Contributor

Joined: 09 Feb 2008
Online Status: Offline
Posts: 1235

Posted: 08 Jul 2009 at 15:52 \| IP Logged

caixinran wrote:

For the Non-passed Spouse (2 years Use test), She may be
qualify for a reduced exclusion by using the month use
divided by 24 months. Then times $250,000.

(If she only use it for 14 months, and the sale of the
residence is due to a change in place of employment,
health or unforeseen circumstances)

calculated as 14/24 x 250,000 = $145,833

Then total exclusion on the MFJ returns will be $250,000
+ $145,833 = $395,833

Please correct me if I am wrong.

Thanks and good luck to all of us!

Thanks a lot for the detailed answer. I really appreciate it.But I do not agree to the last part...In my opinion the proration of the $250k exclusion is only when there is a sale due to 1) change in health 2) change in employment or 3) unforeseen circumstances like war,fire etc. If Bob,a single person got married and the spouse stays 1 day in their principal residence before they decide to sell the house, though Bob would be entitled to $250k gain exclusion(as he meets both the USE and OWNERSHIP tests) but I do not think that any can be taken by the spouse. Thus, the gain exlusion should be limited to 250k even though they will be doing MFJ.

Please do correct me if I m wrong.

__________________
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FARE -87
AUD - 87
BEC - 81
REG - 84
ALL DONE !!!

Arushi

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