How Does the Capital Gains Tax Exclusion Apply to Three Co-Owners of a Home?
Every co-owner, married or not, can claim a $250,000 exclusion, if other conditions apply.
I bought a house with two other friends about 12 years ago. We split the purchase price evenly between us and had surprising good luck in amicably sharing the place all this time.
However, one of us wants to leave and get married, another may accept a job in another state, and I'm thinking it's probably time for us to sell the place. It has appreciated in value: We bought it for $300,000 and expect to sell it for about $650,000.
Can you explain to whether all three of us can make use of the capital gains tax exclusion to avoid having to pay tax on our profits? All of the descriptions I read refer to a combined $500,000 exclusion for married couples, but none of us are married to each other.
If all three of you co-owned and used the house as your principal residence for at least two of the five years prior to the date of sale, you’ll each will be entitled to benefit from the special home-sale tax exclusion. (See The $250,000/$500,000 Home Sale Tax Exclusion.)
This exclusion is most often described or used by either single owners or married couples, but you don’t have to be married, or a couple, to qualify for it. Unmarried co-owners can also use the exclusion.
As long as each unmarried co-owner satisfies the two-out-of-five-year ownership and use tests, each gets to exclude up to $250,000 of his or her share of the gain from the sale. (Married couples who file jointly can exclude up to $500,000 of their gain). Thus, the three of you together could exclude from tax up to $750,000 in gain.
For example, if your home is in fact sold for a $350,000 gain, one third of the gain—or $116,666—will be allocated to each of the three owners. Each owner can exclude up to $250,000 of gain on his or her individual income tax return, so no tax would be due on any of the gain.