Capital Gains Tax Exclusion on Sale of Primary Residence — Married vs. Single Sellers; Ownership Implications When Only One Spouse Is on Title
Avoiding Capital Gains on the Sale of Your Primary Residence
When you sell your primary residence, the IRS offers a generous tax benefit: a capital gains exclusion of up to $250,000 per person. That means most married couples can exclude up to $500,000 of gain on the sale—potentially avoiding capital gains tax altogether.
But there are some important requirements and distinctions, especially if only one spouse is on the deed or if a spouse has recently passed away.
The Two Key Tests
To qualify for the capital gains exclusion under Internal Revenue Code §121, you must meet the following:
• Ownership Test: You (or your spouse) must have owned the home for at least two of the last five years before the sale.
• Use Test: You (or your spouse) must have used the home as your primary residence for at least two of the last five years.
• NOTE: You cannot have used this exclusion for another home sale in the past two years.
For Married Couples:
If you are married and file a joint tax return, you may be eligible to exclude up to $500,000 of
capital gain—even if only one spouse is on the deed.
To qualify:
• You are married and file jointly
• At least one spouse meets the ownership test
• Both spouses meet the use test
• Neither has used the exclusion in the past two year
Example: If only the husband is on the deed, but both spouses lived in the home as their primary residence for at least two years and file jointly, they can still exclude the full $500,000 gain.
For Unmarried or Separately Filing Individuals:
If you’re not married or file separately, each person must independently meet both the ownership and use tests. The maximum exclusion is $250,000 per person.
Special Situations:
What if one spouse dies and isn’t on the deed?
If the surviving spouse sells the home within two years of the deceased spouse’s death, they may still claim the full $500,000 exclusion, provided the couple had met the ownership and use requirements.
What if the sole owner dies?
If the only person on the deed passes away, the property generally receives a step-up in basis. This means that the home’s “basis” resets to its fair market value on the date of death, which can significantly reduce or eliminate any capital gains tax when the surviving spouse sells.
What About New Jersey?
New Jersey follows the federal rules for capital gains exclusions. So if you qualify for the $250,000 or $500,000 federal exclusion, that same gain is excluded from New Jersey income tax. Gains above the threshold are taxed as ordinary income using the state’s graduated tax rates.
SOURCES:
https://ttlc.intuit.com/community/tax-credits-deductions/discussion/does-your-spouse-have-tobe-on-the-title-to-qualify-for-the-capital-gains-exclusion-or-is-filing/00/440679
https://www.deeds.com/articles/youre-married-youre-not-on-the-house-title-what-are-yourrights/
26 U.S. Code § 121 – Exclusion of gain from sale of principal residence | U.S. Code | US Law |
LII / Legal Information Institute
