Section 121

Stu, This exact question came up this year when my husband's sister was going to sell and had been living with bf for over 20 years. I went to 2 CPAs after reading the rules myself and none of us came up with an objection. She sold the house in April and they married in October. I was the matron of honor. And a good time was had by all. Missy Doyle

Sounds like a reasonable interpretation of the statute. The regulations appear to confirm your interpretation, see Treas. Reg. 1.121-2(a)(3), which states that "a husband and wife who make a joint return for the year of the sale or exchange" may exclude up to $500,000 of gain if (A) EITHER spouse meets the 2-year ownership requirement, (B) both spouses meet the 2-year use requirement, and (C) neither spouse excluded gain from a prior sale or exchange of property under sec. 121 within the last 2 years (emphasis added). The Federal Tax Coordinator service from RIA takes the same position, stating "Apparently, the use of the residence need not have occurred while the spouses were married." See FTC Para. I-4536 (RIA)(2007). Your interpretation only makes sense in light of the overall effect of filing a joint return, under which one spouse is in effect taxed on a portion of the income derived by the other spouse, regardless of whether the spouses were married at the time that a particular item of income was derived. If your interpretation did not apply, and assuming that the gain on the sale of the residence was $450,000, then only the husband could claim the gain exclusion, and then only up to $250,000, with the result that the joint return would include $200,000 of gain from the sale of the residence, as to which the wife would effectively be taxed on $100,000 (technically she's subject to tax on the whole $200,000 because of joint and several liability). As a result, wife would be taxed on gain from a house she actually used as a principal residence for the qualifying period, without giving her the opportunity to exclude that gain upon sale. Since the joint return rules apply an all or nothing approach to items of income derived by either spouse, regardless of the marital status at the time such item is derived, it only makes sense to apply that approach to Sec.

I think your analysis is correct. The couple only have to be married on the last day of the tax year of sale but not on the sale date itself.

Tax law says that you make the determination on marital status as of 12/31 of the tax year. Unless the code (it doesn't) specifically requires a married couple to be married on the date of sale to avail themselves of the $500,000 joint return exclusion, then they meet the ownership requirement. The regulations merely require that a joint return be filed for the year of sale and that at least one of the two joint filers meet the ownership test. See REG

-- Alan

From everything I've ever read or seen on bbs elsewhere, I concur 100% with you, Stu. ChEAr$, Harlan Lunsford, EA n LA

concur 100% with you, Stu.

There was a version of Section 121 - different from the one that became law - that was introduced into the House of Reps in 1997 that *did* include a requirement that the spouses be married on the day the house was sold, in order to be eligible for the $500,000 "joint return" exclusion. But that bill did *not* get into the Code, it *died* in Committee. There's a thread about it somewhere on the internet. Also, Bob Bruss, famous *real estate* [as opposed to *tax*] columnist from the SF area wrote in his column last month that the spouses have to be married on the day the house is sold to be eligible for the "joint return" $500,000 exclusion. He was wrong about that but won't admit it.