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07-27-2017 06:33 PM
Hi there! I lived with my mom in my house since 2008. From 2008-2014, my mom was solely on the title. In August 2014, I was added with 50% ownership. In September 2016, I got married and moved out, and in December 2016, I became 100% owner. The home has appreciated over $500k. Since my husband never lived in the house, only I am eligible to exclude $250k of the gain. If my mom passes both the ownership and eligibility tests, but is not on the title at the time of sale later this year, can she exclude $250k of the gain? Thanks, ATK.
Solved! Go to Solution.
07-27-2017 06:56 PM
Welcome to the H&R Block community.
In order to take the exclusion for gain on the sale of a home you must be the legal owner of the home when it is sold, have a gain on the sale, and meet the other requirements.
Because you are the sole owner of the house only you will recognize gain from its sale and only you will be able to take the exclusion. Also, if you and an unmarried person had co-owned the house 50/50 when it was sold then you would each be eligible for 1/2 of the individual exclusion amount ($125,000/$125,000). You only get the $500,000 exclusion if you are married to the other person and filing jointly.
One way that you could lessen the tax burden somewhat would be to sell through an installment sale. This won't necessarily lower the capital gains tax, but you'll receive the income over more than one year so that the tax burden is lower each year.
Also, make sure that you correctly calculate your adjusted basis in the house because there are lots of things that increase your basis, and the higher your basis is the lower your gain will be. For instance, if you paid $10,000 for a new roof then your basis increases by $10,000 and your gain will be that much less. Your adjusted basis is equal to: TOTAL PURCHASE COST + IMPROVEMENTS - DEDUCTIONS & CREDITS TAKEN FOR ENGERGY EFFICIENT ITEMS, CASULATY LOSSES, & DEPRECIATION = ADJUSTED BASIS. For you, instead of your purchase price, your formula begins with your mom's basis in the home at the time she passed it to you. If you're not sure what that is you may have to ask her what she paid for the house and what she put into it over the years.
Your taxable gain is figured by:
SALE PRICE - SELLING EXPENSES = REALIZED AMOUNT - ADJUSTED BASIS = GAIN ON SALE - EXCLUSION = TAXABLE GAIN
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)
07-27-2017 07:37 PM
Thank you for your reply.
From the IRS at:
"For joint owners who are not married, up to $250,000 of gain is tax-free for each qualifying owner."
and from nolo.com at:
"Every co-owner, married or not, can claim a $250,000 exclusion, if other conditions apply."
It seems like there is no limit of $500,000 that would be divided among all unmarried owners. Can you refer to any documentation of the splitting of the individual exclusion?
Unfortunately I can't do an installment sale because I need the money to buy another home this year.
I have considered the new basis when the property was transferred to me, but even with the formula you provided, the taxable gain is still well over $250,000.
07-27-2017 08:59 PM
You're quite welcome.
If I was mistaken I certainly apologize. That's the way I learned about the exclusion but I'll look it up myself. Every so often that happens even to the best of us pros.
Even so with you being the only legal owner you're the only one who can claim an exclusion, so the limits is still $250,000.
I thought about a 1231 exchange when I saw that you were buying another house, but you can't do that with a personal residence so that one won't work. A 1031 exchange delays the payment of the tax when you invest money from selling one asset into the purchase of another like asset, but it's mainly for business assets.
Another option, if the tax ends up being a large amount that you can't afford, is to make an "offer in compromise" to the IRS. If accepted, your tax will be reduced to an amount that you can afford to pay based on the information you provided. You can find more information on offers in compromise on the IRS website under the "tools" tab.