@shelley1991 wrote:
It is my primary residence that I have lived for several years and still currently live at. She does not live here but may move in if I leave. The home has over $600,000 capital gains. Both she (after living 2 years) and I can claim $250,000 exclusion. If home was sold today, I would pay taxes on $50,000 and she would pay taxes on $50,000.
However, this is the confusing part. Assuming no home value change. She feels that once I am off deed, she will be taxed based on $350,000 ($600,000 capital gains minus $250,000 exclusion) if the house is sold after 2 years. So she thinks that I should pay her an additional percentage for this taxed amount. So I would be taxed twice?
Would the gift tax apply in this situation instead? Thank you.
Let's start with the question of gain. That depends on how much you paid for the property, or the value when you inherited it, and we may want to pursue that further.
Moving on, we will assume you are correct that there is $600,000 of overall gain. You haven't said what the overall value is or the proposed price she would pay for your half. That all affects the outcome.
I think you also misspoke, if you both sold today, you qualify for the exclusion but she does not, so you pay tax on $50,000 but she pays tax on $300,000.
Let me create an example for you. Let's assume you jointly inherited the home from a parent, and the value on the date of the parent's death was $400,000 and the current value is $1 million. That would represent a gain of $600,000. Each sibling has a cost basis of $200,000, and each sibling would have a gain of $300,000 if the home was sold today.
Suppose your sibling buys you out at full fair market value of $500,000. You have sales proceeds of $500,000, a basis of $200,000, which equals a $300,000 gain, and you qualify for the exclusion.
Now, your sibling's cost basis is increased by the price they paid for your half. In this case, your sibling's cost basis is increased to $700,000 (her original $200,000 basis plus what she paid for your share). If she sells for $1M, her gain is still only $300K (selling price minus her adjusted basis). And if she manages to wait the 731 days, then she would also qualify for a $250K exclusion. You don't owe her anything because she takes a basis adjustment of whatever she paid you.
