In our Chicago South Loop Tax Preparation office, we frequently meet with engaged couples for tax planning purposes. An issue that comes up often is the one of homeowners marrying each other. Engaged couples that each own a home have to decide which home to move into, & which home to rent out, or sell. Keep reading to see how you can sell your home and pay ZERO TAXES on up to $500,000!
1.) Don’t sell until AFTER THE WEDDING. If you sell your personal residence for a profit, you may be able to exclude up to $250,000 as a single person, and up to $500,000 if you’re married. In order to get the entire $500,000 both spouses must have used the home as their primary residence for at least 2 years out of the last 5 years. If only 1 spouse used the home as a residence, the maximum exclusion will be $250,000.
2.) File your taxes married filing jointly. Check with your tax professional to see if this is the best filing status for your situation. Tax debt, student loans, and child support obligations need to be taken into consideration before choosing this status.
3.) Sell the home that at least 1 of you have lived in for 24 months out of the last 5 years. In order to qualify for the personal residence capital gain exclusion you must meet the ownership and residency test. Per IRS.gov “If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.
HOWEVER, for the residence test, the IRS says: unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion. If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn’t have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period.
4.) If you’re going to rent the home, remember to account for any property improvements when figuring your basis for depreciation. For example, if you purchased the home for $100,000 & you’ve added a $10,000 porch, and a $20,000 roof, your basis (amount of money in the property) is now $130,000. There are other rules that need to be considered when figuring tax basis, so consult a tax professional.
5.) If you rent to family, family includes only your spouse, brothers and sisters, half brothers and half sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). MAKE SURE TO CHARGE THEM FAIR MARKET VALUE FOR RENT so that you don’t lose out on valuable tax deductions!
Although we’ve given you the basics, this is not an all-inclusive article. Should you have tax debt help questions, need Chicago business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.
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