Real Estate Matters: Married couple toys with the idea of selling their home — to themselves, essentially
Q: My wife and I own our home jointly. The home has appreciated substantially in the 25 years we have owned it to the point that when we sell, we will net more than $500,000 in profit. That means, we’ll likely owe some tax.
Consequently, we are thinking that we would jointly sell our house to my wife exclusively and only to her. That way we, as joint owners, would claim the $500,000 exemption from capital gains and reset her basis in the house to the sales price used in the transaction. Down the line when she sells the home, she would be eligible for another $250,000 exemption on capital gains.
Can this be done legally? You should also know that we need to do this soon. I moved to Florida and have been a legal resident here for the last two years, but my wife has remained a resident in the state where our home is located. Can this work and is it 100% legal?
A: Uh, no. What you want to do won’t work and isn’t legal — even though it sounds as if it should be. We believe the IRS would frown on you and your wife selling the home to yourselves, and even the conveyance from you of your share of the home to your wife shouldn’t qualify as a legitimate transaction.
For our readers playing along at home, here’s the background: If you own a home as your primary residence and have lived in the home as the owner occupant for two out of the last five years, the IRS allows you to avoid paying taxes on up to $500,000 in profits from the sale if you are married, or up to $250,000 in profits if you are single. That’s the general rule in a nutshell. It’s a great benefit to homeowners who have owned their homes for a long time, and who are lucky enough to live in places where real estate prices have gone up substantially over the years.
In your case, you have 25 years of accumulated appreciation, and you expect your net profits (more on how to calculate this in a moment) to exceed $500,000.
We think most folks would be pretty happy to know that you could sell the home you lived in for the last 25 years, take a profit of $500,000 and not pay any taxes on that portion of the profit. It’s a great deal for homeowners.
But your profits exceed $500,000, so in dreaming up ways to avoid paying taxes on the profit above $500,000, you’ve imagined that you can sell the home to your wife. Except that your wife is already an owner of the home. She can’t sell her share of the home to herself.
If you can’t do that, you might wonder about setting up a corporation that is wholly owned by your wife: You and she would sell the property to the corporation that your wife owns. Ah, but this opens up another can of worms. One issue: The corporation would own the property and the $500,000 exemption wouldn’t be available. (By the way, we’re pretty sure that some of our readers have tried this, perhaps even successfully. But we don’t think it passes the “sniff test.”)
At best, you could sell your wife your half interest in the home, but it would seem quite strange to sell your half of the home to your wife and have money go from your (presumably joint) account to her account. You would then have to file a tax return showing the sale, but the funds from that sale would effectively have gone from the right hand to the left hand.