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Capital Gains Tax Question

jclakins

Hello,

In 2017, I helped my girlfriend (now my wife) buy a house because her credit was a little below what was needed to finance the house and she needed something for her and her children to live in. It was supposed to be a temporary arrangement and she was going to re-fi at some point to gain sole ownership of the property. Our relationship became more serious and once marriage was in the discussion she opted not to persue a re-fi because her children and now grown and gone and she moved in with me a few months ago.

The house was purchased in 2017 for 50k and sold last month for 164k. After everything was said and done, the proceeds from the sale were 106k. The financial institution issued two checks for 53k to each one of us since both of our names were listed as property owners (even though I never paid a dime toward the place in the 7 years she owned it). I know that she should have an CG tax exemption since she actively lived there, but where does that leave me as far as capital gains tax options? Will I have to pay a hefty federal and state CG tax on the 53k that I received or do I have any options to lower my tax burden for my share of the sale? Would it be better if we jointly file next year instead of filing seperately?

The 53k that was issued to me is her money as far as I am concerned, but on paper it is mine and I did not ever live at her address so I can't use the exemption. We're curious how much this might cost her.

Any advice is greatly appreciated! We will definitely have a CPA do our taxes this coming year but I would like to know what might be coming our way so that we can prepare for it.

Thank you!

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Accepted answers

CoryF

Welcome to our community, Jclakins.

You present an interesting question. Since the financial institution sent you documentation as part owner, you would end up paying the hefty Capital Gains tax. As a single or Married Filing Separately status, you would have to report your half of the Home's Sales price, sales expenses, and cost of the home as part of your tax return filing. There would be no way to reduce your tax burden at that point.

However, since the second question introduces the possibility of filing a Joint return (since you are married), this is the better option. The Section 121 exclusion only requires that one spouse had owned and lived in the home for 2 out of the last 5 years. This would allow you to exclude the full proceeds of $106k and no Capital Gains taxes would be owed as part of this home sale. I advise you to take this option as it is better overall for taxes owed on the Sale of the home.

All comments

CoryF

Welcome to our community, Jclakins.

jclakins

Cory,

Thank you so much for that answer! Sounds like we are filing jointly! :)

Follow up question: In a year or two when we sell the current home we are in, will we be able to use this exemption again since I have lived in this house for over 10 years?

CoryF

Thank you for this followup question.

There is a look-back requirement for this exclusion. You will be asked if you sold another main home for a gain in the two-year period before you sold the [current] home.

So, if you are planning on saling your current home, you will have to wait two years from the sold date to qualify for the Section 121 Exclusion to apply to the CG of your current home.

MintchipLover

Is this something that I could file on FreeTaxUSA myself?

CoryF

Thank you for this question MintchipLover.

Yes, FreeTaxUSA does support the Sale of Main Home treatment. There are pages that you will need to visit within the Income section for the Sale of Main Home to direct how to report this sale on your current year tax return.