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Some Tax-Free Profit Allowed on Home Sale
Question: My girlfriend and I both own our own houses. We expect to get married this year. She plans to sell her house and move in with me. If she invests the proceeds from her house sale by paying down my mortgage, could she avoid capital-gains tax that she would owe on the sale of her house?
Answer: No. The best way to avoid tax when selling a principal residence is to follow the simple rules of Internal Revenue Code 121. It allows up to $250,000, or $500,000 for a married couple filing jointly, tax-free home-sale profits.
To qualify, the seller must have owned and lived in the primary residence an aggregate of two years during the five years before the sale. If your girlfriend meets the two-year test, her sale profit up to $250,000 is tax-free. Paying down the mortgage on your house won't help her save taxes. For further details, she should consult her tax advisor.
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Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to P.O. Box 280038, San Francisco, CA 94128. Bruss suggests consulting an attorney or tax advisor before making important real estate decisions.