Relevant IRC Provisions:
IRC Section 121: Exclusion of gain from the sale of a principal residence.
Under IRC Section 121(b)(2), married couples filing jointly (MFJ) can exclude up to $500,000 of capital gain from the sale of their home if:
Either spouse meets the ownership requirement (i.e., owned the home for at least 2 years out of the 5 years preceding the sale).
Both spouses meet the use requirement (i.e., lived in the home as their principal residence for at least 2 years out of the 5 years preceding the sale).
Key Points:
If both spouses meet the use requirement, they can exclude up to $500,000 of gain on their joint return.
If only one spouse meets the use requirement, the exclusion is limited to $250,000.
Application to Your Scenario:
In your scenario:
The spouse meets the use requirement but the taxpayer does not.
Therefore, the capital gain exclusion would be limited to $250,000, even if filing MFJ.
This is because the full $500,000 exclusion requires that both spouses meet the use requirement, and in this case, only one spouse does.
References:
IRC Section 121(b)(2): “Special rules for joint returns. In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property—(A) paragraph (1) shall be applied by substituting ‘$500,000’ for ‘$250,000’ if…(ii) both spouses meet the use requirement of subsection (a) with respect to the property.”
This section clearly states that the full $500,000 exclusion is available only if both spouses meet the use requirement, otherwise, it is limited to $250,000.