“My question is about how my wife and I can sell our homes and then buy one home together without getting slammed on income taxes.
I lost my first wife to breast cancer 6 years ago. My wife lost her first husband to pancreatic cancer about the same time. We met in church have been blessed to find each other. We got married in August.
We each own homes that we’ve had for years. My wife’s home they bought in 1990 for about $185,000 and is worth about $400,000. We bought my home in 1982 for $210,000 and its worth about $650,000.
We want to sell both homes and buy one together, but our new house will only be about $300,000.
How do we do all this without getting hit with big income tax bills?”
I am so happy for both of you. You’ve come through some very difficult times in your lives and found love on the other side. I pray that more people who face tragedy find the courage and strength to persevere. Love and happiness may very well find them again.
The tax laws that govern primary residences is reasonably flexible. You may have an opportunity to consolidate without too much income tax pain.
Assuming your wife lived in her home (former or not) for at least two of the last five years, she can sell it, realize the gain ($215,000 +/-), and pay no income tax. The IRS permits individuals to sell homes with up to $250,000 of gain without paying tax. So far, so good.
Your home has about $440,000 of gain. Exceeding the individual exclusion of $250,000 means it appears you will pay capital gains tax on about $190,000 ($38,000 of tax or so). However, if you and your wife have lived in your home for two of the last five years you will receive the married exclusion of $500,000. And . . . therefore . . . pay no income tax on the sale of your home . . . and keep $38,000 in your pocket.
If you haven’t yet lived in your home as husband and wife for two years – $38,000 might be a nice incentive to stay there until you reach the required two years.
Please take the small amount of time it would take to sit with an experienced and trusted tax advisor to walk through all your numbers. Our More than Money tax advisors will be happy to assist you and your wife to plan a wonderful – less taxing – future together.
If you have questions or comments, please send them to Gene@AskMtM.com