Selling Houses and Paying Taxes: Your Questions Answered

A second marriage often finds the couple with two houses. Purchasing a new home and putting your own stamp on it is one of the joys of starting a new life together. But you’ll want to be savvy about the tax laws when selling your existing two houses.

Q: What are the tax rules for excluding profit when you sell your house?

A: Eligible homeowners can exclude up to $250,000 ($500,000 for married couples) of gain from income tax on the sale of a residence. To be eligible, you must meet all three of the following requirements:

1. Ownership. You must have owned the home as your principal residence for periods adding up to at least two years within the five-year period ending on the date of the sale.
   
   
2. Use. You must have occupied the home as your principal residence for periods adding up to at least two years within the five-year period ending on the date of the sale.
   
   
3. One sale in two years. You must not have used the $250,000 (or $500,000) exclusion for any residence sold or exchanged during the two-year period ending on the date of the current sale.

Q: We’re getting married next year. We each own a residence, but want to sell both and buy a new one together. Will we owe income tax on the gain for one or both houses we sell?

A: You can exclude the gain on the sale of both of your existing homes, but only if you are careful about the timing. Here are two scenarios:

Both existing houses sell in 2015, before your marriage in 2016.

This entitles each of you to exclude up to $250,000 on your 2015 individual tax returns. It doesn’t matter when you purchase your new home, but if you decide to sell it, you’ll be eligible to exclude up to $500,000 of gain on a joint tax return after both of you have lived there at least 24 months.

Neither house sells before you get married in 2016 and you now live in a new home.
Since you both qualified as individuals for the $250,000 exclusion before you were married, you each remain eligible to exclude gain up to $250,000 on your joint tax return in the year that each house sells. However, you’ll need to continue to meet the “Use Requirement” noted above. If your 24 months of qualifying residency falls outside of the last five-year period, the exclusion will no longer be available.  

For more information, see IRS Publication 523.

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