Who is eligible for $250,000/$500,000 capital gains tax exclusion? How long must a couple be married to be eligible for the $500,000 capital gains exclusion?
The Taxpayer Relief Act of 1997 produced significant changes in the way Federal capital gains on the sale of a primary residence is taxed. Under the pre-1997 U.S. tax law, to avoid paying the 28% capital gains tax on the profit realized from the sale of a home, a Seller had to reinvest or “roll over” their profits into another principal residence of equal or greater value. For homeowners aged 55 or older, the law provided for a one-time exclusion of $125,000 of capital gains.
Under the law now in effect, single taxpayers can realize up to $250,000 in tax free gain on the sale of a principal residence. Married taxpayers who file a joint tax return are entitled to an exclusion of $500,000. These exclusions cover any property that has been used as a principal residence for at least two of the five years preceding a sale. The deductions may be taken each time a taxpayer sells a principal residence, although the exemption may not be claimed more frequently than once every two years. This exclusion is available regardless of the taxpayer’s age and is not affected by whether a homeowner had previously claimed the $125,000 exclusion under the prior tax law.
A property owned by a single person will become eligible for the $500,000 capital gains exclusion if they marry and file a joint tax return with their spouse. The married couple can take advantage of this exclusion even if they marry on the last day of the year provided that they file a joint tax return for the year in which they were married, the couple lived at the property for at least two out of the last five years prior to the sale, and neither individual claimed a capital gains tax exclusion on the sale of another residence during the two years prior to the sale of the marital property. Furthermore, the married taxpayers will be eligible for the $500,000 exclusion even if they did not transfer the property into both of their names since the property is considered marital property.