Q: Last June, after many years of trying to settle on a dollar figure for our home, I finally made it. I am legally separated from my wife, pay alimony and she lives out of state. We both are over 55. The question is, now that I own the house alone, am I entitled to a one-time exclusion of $125,000 or only half of that amount when I elect to sell this home? A: I am reluctant to suggest it, but you may be better off obtaining a divorce, rather than continuing your "legal separation" status.
Under the tax laws, if you are 55 years of age or older and you sell your house at a profit, you are permitted a once-in-a-lifetime exemption on your profits of up to $125,000. There are certain tests required to enable you to qualify for this exclusion, and the main tests are that you must be 55 or over before the day of the sale, and you must have owned and occupied the house as your principal residence for at least three of the five years preceding the day of sale.
This one-time exclusion applies to cooperative apartment ownership and to condominiums, as well as single-family personal residences.
However, the law is also clear that the exclusion is limited to $62,500 in the case of a separate return filed by a married individual.
I have researched the tax laws, and quite frankly, as in many other tax issues, the Internal Revenue Service code does not give clear guidance to either tax lawyers or taxpayers.
There are those who have interpreted the Internal Revenue code to read that "the statute blurs the separate identities of husband and wife" and this blurring may permit an election, even though one spouse does not qualify or indeed denies the election to a spouse otherwise entitled to the exclusion. Other commentators take a different position, namely that if you are married at the time of the sale, your spouse must agree to the election -- or else you are not entitled to that once-in-a-lifetime exclusion.
As I understand your situation, although you are "legally separated," you have not obtained a final and absolute court decree of divorce.
Limited divorces vary in their consequences from state to state, but the general rule is that such limited divorces -- or legal separations -- do not affect the status of the parties as married persons, and clearly do not dissolve the marriage.
Thus, as I read the statute, since you are married, and presumably filing a separate return, you would only be entitled to take half of the once-in-a-lifetime exemption, or in other words, an exclusion of $62,500.
Now this might not be a concern if your profits from the sale of the house do not exceed the $62,500 figure.
On the other hand, if you were one of the fortunate people who purchased your house many years ago, I suspect that your profit is in fact over that amount.
You may, of course, have personal or religious reasons for wanting to continue the "legal separation" status, but my advice is to consider obtaining a final divorce, before the sale.
Needless to say, you must be over 55 years old, and you must have lived in the property as your personal residence for three out of the last five years.
And although you did not ask about a subsequent marriage, while I am on the subject, the other side of the coin should also be addressed.
If a taxpayer and spouse each owned a residence before their marriage, and after their marriage sold both residences, unfortunately the tax laws permit an election only with respect to one residence.
And finally, if one of the parties in a marriage meets the age, holding and use requirements, both spouses are treated as meeting the requirements.
Thus, a married couple -- one of whom is 55 or over and the other is under 55 -- would be entitled to the once-in-a-lifetime exemption -- provided terminate composition of course that the other tests are met.
I suggest that you contact your divorce lawyer to explore your situation further.