Minimizing gain recognition on the sale of a residence when two homeowners marry.

• Author: Ellentuck, Albert B.

Facts

Roy and Pam are engaged to be married. Roy's tax adviser learns of the engagement during a taxpayer interview. The adviser also learns that Pam owns a home in town, as does Roy. Roy indicates that they plan to sell his home and live in Pam's. In addition, the tax adviser learns from Roy that the cost of Roy's house is $70,000 (including improvements) and has a fair market value (FMV) of $95,000, while Pam's cost is $110,000, with a FMV of $100,000.

Issue

What is the best way for Roy and Pam to minimize the amount of gain recognized for income tax purposes?

Analysis

Roy and Pam need to proceed cautiously, as several pitfalls exist in their situation. Ideally, Pam should sell her home, and they should live in Roy's. Because her residence has an unrealized loss, selling it would avoid any current taxation or replacement home concerns.

Assume that sometime after they marry Roy and Pam wish to sell his home and jointly purchase a new home. If Roy's home subsequently sells for $95,000 and a replacement home is purchased for $120,000, the recognized gain will be either zero or $25,000. If Roy and Pam file a consent to treat the sale of Roy's residence and the purchase of the new residence as being...