Q: My husband is 56 years old, and I am 51. We plan to sell our house and move to a retirement community down south. Since we expect to make alot of profit on our house, we were hoping to take advantage of the once-in-a-lifetime exclusion for senior citizens. However, we were recently advised that both of us have to be 55 years old. Can you advise?
A: Whoever gave you the information is dead wrong. The tax laws make it very clear that when a husband and wife hold their residence as joint tenants, tenants-by-the-entirety (or community property in the western states), and if they file a joint return in the year in which the residence is sold, the couple is treated as a single person for purposes of the tax exclusion. Thus, if one spouse meets the various requirements, both of you will be treated as eligible for the once-in-a-lifetime exemption.
When Congress passed the Economic Recovery Tax Act of 1981, this was the most comprehensive revision of the tax laws since 1954. One of the changes in the tax law for property owners was an increase in the once-in-a-lifetime exemption to $125,000, for sales made after July 20, 1981.
To qualify for the exclusion, the taxpayer must be at least 55 years of age before the sale. The taxpayer must have owned and used the residence as his or her principle residence for a total of at least three years during the five-year period ending on the date of the sale of the residence. For purposes of the tax law, a residence includes a condominium or ownership in a cooperative.
Thus, as long as your spouse is over 55, you will qualify for the $125,000 once-in-a-lifetime exclusion. In effect, what this means is that $125,000 of your profit on the sale of your house is excluded from gain; in other words, you don't have to pay tax on that much of the profit of your house.
However, only one lifetime election is available to a taxpayer, and married couples are entitled only to one election per couple--not to one for each spouse. If a couple makes an election during their marriage and they subsequently divorce, no further election is available to either of them or to their future spouses should they remarry.
If a taxpayer qualifies for the once-in-a-lifetime exclusion of gain, the transaction should be reported to the Internal Revenue Service when you file your income tax on Form 2119. The Internal Revenue Service or your tax advisers will assist you in obtaining and preparing this form.
If the new home that you are planning on purchasing is equal to or greater than the sales price of your old house, then it would be important for you to sit down with your calculator and "do the numbers." It may very well be that you can defer the profit on your house if your new house qualifies for the so-called (rollover) concept. Under this approach, the tax laws permit the homeover to defer the old profit on the old house until the sale of the new one. Since you would still be entitled to the once-in-a-lifetime exemption if you ever plan on selling your new house, it may be to your advantage to take the deferment rather than the once-in-a-lifetime exemption when you sell your present house.
Both options are available to you. You should give serious and careful consideration to all of the options before you file your income tax returns.
Benny L. Kass is a Washington attorney. Write him in care of the real estate section, The Washington Post, 1150 15th St. NW, Washington 20071. For a copy of the free booklet, "A Guide to Settlement on Your New Home," send a self-addressed, stamped envelope to Benny L. Kass, 1528 18th St. NW, Washington 20036.