@terimac4 wrote:
Does this mean I should wait 2 years before selling? This appears a bit more complicated than I thought. Bottom line is can I reinvest at this point into a more expensive home or are there still tax affects?
That depends on too many other factors.
For the lowest capital gains tax, you need to use the home as your main home for 2 years and own it at least 2 years. This counts when you lived in the home as your main home, not necessarily when you owned it. So if you lived in the home before your parents gave it to you, you can count that time. However, to meet the 2 year ownership test, you must also actually own the home.
I agree that for the capital gains tax, your holding period is combined with your parents, so you probably get the long term rate even if you sell today. But that doesn't help with the $250,000/$500,000 exclusion rule, which requires your own actual ownership.
If you planned to live in the home more than 2 years, and are being forced to sell due to certain specified or general "unforeseen circumstances" as described in publication 523, you can get a partial exclusion. That might be enough. For example, if you do qualify for the partial exclusion rule and you sell in July, you can exclude up to 10/24 (months) of the normal limit of $250,000 single or $500,000 married, which would be $104,000 or $208,000. That would make most or all of the gain excludable, assuming you meet the conditions for that partial exclusion, and depending on your parents's basis.
You also have opportunity cost to think about. Suppose your basis really is just $65,000 (it is probably higher) and your gain will be $265,000. The tax on that is $39,750 for most people. What would you do with the money? If you can invest it and make more money, then paying the tax is still worth it. Or, if you have a 2 hour commute each way and want to move closer to work, that $39,750 of tax you would pay might save you 600 hours a year in time, plus gas and tolls. If your time is worth $50 an hour, that comes out a lot closer than it seems at first. Or the house is right next to the train track and 10 trains a day go past the house, waking up your new baby. Moving early and paying the tax would be like paying $10 per train for peace and quiet.
There's no right answer for everyone.
