Filing Joint Returns

• Prior to evaluating the maximum gain you can exclude on the sale of your home, the most fundamental requirement is that you file a joint return with your spouse for the tax year that you sell the home. All that the IRS requires for the filing of a joint return is that you be legally married by the last day of the tax year. However, this requirement only applies to marriages between a man and a woman.
  
  

Home Gain Exclusion

• The tax break available to married couples who sell their principal residence is an increase in the profit you can exclude from the capital gains tax from $250,000, which applies to single and head of household filers, to $500,000. However, only your principal residence is eligible for the exclusion, which means you will owe the IRS capital gains tax for the gain you recognize on the sale of a vacation, rental or other investment property you own. If you sell your main home, you and your spouse must satisfy the requirements of the ownership and use tests.
  
  

Joint Use Test

• The first requirement the IRS imposes to qualify for the higher exclusion amount is that both spouses use the home for a total of two years during the five-year period that ends on the date of its sale. It is not necessary that the two years be consecutive; you remain eligible if you move multiple times during the five-year period. However, both spouses must separately satisfy the test. For example, if you live in your home for the entire five-year period and you marry one year before you sell the home, it's impossible for your spouse to satisfy the use requirement unless she lives with you prior to getting married. As a result, you can still exclude the gain on the sale of the home, but only up to $250,000.
  
  

Ownership Test

• The second test only requires that one spouse be the legal owner of the home for two of the five years. Using the above example, if your spouse moves into your home two years before the sale rather than one, it's not necessary that you add her to the deed or mortgage. The fact that one spouse legally owns the home is sufficient. However, if your spouse sells a different home within two years of the second sale, and she takes advantage of the home gain exclusion, the gain on the sale of your home will only qualify for the $250,000 exclusion, not $500,000.