Q: I am getting a legal separation from my wife, but I want my children to remain in the family home. Then my ex-wife and I will sell the house when the children are grown. But I will not be living there at that time. Will I lose my $250,000 principal-residence sale exemption? -- Douglas R.
A. Good news for you! If you and your wife have a written legal separation agreement, or a divorce agreement, providing for sale of the principal residence at a future time, such as when the youngest child becomes 18 or 21, you each can qualify for up to $250,000 in tax-free capital gains under Internal Revenue Code 121.
To qualify, the "in spouse" (that's your wife) who is living in the principal residence must have owned and occupied the home at least two of the five years before its sale.
Although you will be the "out spouse" who doesn't meet this occupancy test of IRC 121, since you are legally separated or divorced at the time of the home sale, you can still qualify for up to $250,000 of tax-free capital gains if you are on the home title at the time of its sale. Consult your tax adviser for full details.