What happens when we sell a house with mixed ownership?

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Q. My wife and I, both seniors, have owned a house in New Jersey since 1988. Ten years ago we bought a house in Florida. I retired, moved to Florida and became a resident there. But my wife works in New Jersey, stays in New Jersey 11 months per year and pays New Jersey tax. I have stayed in the New Jersey home for 24 months during the past five years. If we are selling our New Jersey home, can we claim our New Jersey home as our primary residence? Is it true that my wife qualifies for $250,000 tax exemption against gains while I do not qualify for the same exemption?
— Uncertain

A. There are two tests one must pass to qualify for the capital gains exemption.

In short, you are correct.

Your wife qualifies for the exemption, but you do not, said Laurie Wolfe, a certified financial planner and certified public accountant with Peapack Private Wealth Management in New Providence.

Here’s how the rules work.

Taxpayers may exclude from income $250,000 worth of capital gain associated with the sale of their principal, or main residence if they satisfy two tests, Wolfe said.

A married couple can exclude up to $500,000, or $250,000 each, she said.

The two tests are the ownership and usage tests.

First you should determine which home is your main home, Wolfe said. You can only have one.

“A `facts and circumstance’ test is used to determine which property is your principal residence,” Wolfe said. “This would be where you spend the most time, where your doctors are located, where you vote, where you have a drivers’ license, and more.”

In the case of you and your wife, your main home is in Florida and your wife’s is in New Jersey, she said.

“We really could stop right here because you indicated that Florida became your main home shortly after 1988,” she said.

But let’s look at the two tests anyway.

The first is the ownership test.

“This test says that you must have owned this home for at least 24 months out of the last five years with the end point being the date of sale,” Wolfe said. “For a married couple who files a joint return, only one spouse must meet this test. You and your wife meet this first test.”

The second test is the usage test.

“You each must have used the home as your residence for at least 24 months of the prior five years,” she said. “These 24 months can happen anytime within that five-year period.”

Your wife passes this test and you state that you both satisfy the condition that in the past 60 months, you both have lived in New Jersey for 24 months.

“So although you both meet the ownership and use tests, the New Jersey home is not your principal, or main, home and therefore, you are ineligible to exclude your half of the gain on the home,” Wolfe said.

You should consult with a tax professional who can go over the specifics of your situation.

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This story was originally published on June 2, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.