Sophia and Lars had a 12 year old son who was going to live with Sophia in the family home after the divorce. The home had a capital gain of $984,000. They agreed that Sophia would sell the family home in 6 years when the son graduated from school. Lars stayed on the deed and their agreement was stated in their divorce decree. Even though Lars left the family home, he was able to satisfy the Ownership period and Sophia's continued residence in the house satisfies the Use test for Lars. After leaving the house, by staying on the deed, he was able to satisfy the Ownership period. When the house was sold, both Sophia and Lars were able to take a $250,000 exclusion for a total of $500,000.
This exclusion is allowed every two years. Lars could have bought his own house, sold it in two years, taken up to a $250,000 exclusion on it and still be able to take the $250,000 exclusion on the family home. It will work as long as each sale is at least two years apart.
Even if Sophia and Lars both get remarried to other partners, as long as Lars stays on the deed he can still take up to a $250,000 exclusion. Let's say that Sophia got married to Peter and Peter moved into her house. At the time of the sale, Peter would have also fulfilled the two year requirement for the Use period and he could use Sophia's Ownership period because of being married to her. So, according to the IRS, he could also take a $250,000 exclusion!
If Lars gets married to another partner, she is not entitled to take a $250,000 exclusion because she did not use the residence as her principal residence.
The savings of $50,000 comes from calculating 15% federal capital gains tax plus 5% state tax (in some states) for a total of 20% tax savings on $250,000 equals $50,000.
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