Article Date:
October 2021

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Refresher: Principal Residence Gain Exclusion Break (Part 3 of 3)

With residential real estate markets sizzling, significant unrealized gains are piling up for many homeowners. That’s good news if you’re ready to sell, but what about the tax implications? Good question.


Thankfully, the federal income tax gain exclusion break for principal residence sales is still on the books, and it’s a potentially big deal for prospective sellers.


If you’re unmarried, the exclusion can shelter up to $250,000 of home sale gain. If you’re married, it can shelter up to $500,000.1 That helps!


This is Part 3 of our three-part refresher course on how to navigate the twists and turns necessary to wring the maximum federal income tax savings out of the home sale gain exclusion break, which might be more valuable than ever right now.


For Parts 1 and 2 of our analysis, see Refresher: Principal Residence Gain Exclusion Break (Part 1 of 3) and Refresher: Principal Residence Gain Exclusion Break (Part 2 of 3).


Let’s now get started with Part 3. Here goes.


How to Exclude Gain in Marriage and Divorce Situations


In both marriage and divorce situations, a home sale often occurs. Of course, the principal residence gain exclusion break can come in very handy when an appreciated home is put on the block.


Sale during Marriage


Say a couple gets married. They each own separate residences from their single days. After the marriage, the pair files jointly. In this scenario, it is possible for each spouse to individually pass the ownership and use tests for their respective residences. Each spouse can then take advantage of a separate $250,000 exclusion.2


Put another way, each spouse’s eligibility for a separate $250,000 exclusion is determined independently, as if the couple were still unmarried.3


Example 1. You get married and decide to move into your spouse’s home. You also own a home. Neither of you had lived in the other’s home before the marriage.


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