Taxpayer has owned and lived in Taxpayer’s principal residence for 10 years, the last year with the

Taxpayer has owned and lived in Taxpayer’s principal residence for 10 years, the last year with the Taxpayer’s Spouse after they married. Spouses decide to sell the residence which has a $100,000 basis for $500,000.

(a) If the Spouses file a joint return do they have any gross income?

(b) What result if the Spouses had lived together for two years in Taxpayer’s residence prior to their marriage and sold the residence after one year of marriage for $500,000?

(c) What result in (a), above, if after one year of marriage Taxpayer pursuant to their divorce decree deeded one-half of the residence to Spouse and Spouse lived in the residence while Taxpayer moved out and, one year later, they sold the residence for $500,000?

(d) What result in (a), above, if after one year of marriage Taxpayer pursuant to their divorce decree deeded one-half of the residence to Spouse and Taxpayer continued to occupy the residence while Spouse moved out, and, one year later, they sold the residence for $500,000?

Expert Answer

 

Answer a.
failed 500k, but look at each separately for 250k. Taxpayer owned and used for 2 years so he is entitled to 250 exclusions. Spouse, by reason of saving provision. Since T owned for 10 years S satisfies ownership. Spouse continues to fail the use. Total exclusions each qualify for is 250 and 150 of gain is recognized, but 250 of gain is excluded under statute
Answer b.
Does their marital status matter? Yes, it does. When is marital status determined for purposes for tax returns? On the last day of the tax year. Someone married on the 31st of December is viewed as being married since the beginning of the year. T qualifies under ownership and use, but S does not qualify for ownership ( but “either” in statute doesn’t require ownership by both) but S does qualify under the use provision since she has used it for two years.
Answer c.
Taxpayer selling ½ of it, but has owned and used it for 10 years. The gain would be 200, and the eligibility would be 250. Underlying assumption that this was a 1041 transfer. Spouse has ownership for only 1 year. At the time of sale the spouse owns a half which has been owned for a year, the use is for 2 years. One the face the spouse would not get an exclusion under 121a because she has not owned it for 2 years. 121 d3a.   Spouse qualifies for ownership. D3a, neither one of them will have any recognized gain from this transaction.
Answer d.

Neither one has gross income recognized, each gets 250 exclusion. Just apply d3(B) relaxation provision

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