My dad is planning on gifting his rental property to me and my brother 50-50 ownership.
Understand that when you are gifted the property you do *not* get a step-up in the cost basis. Your cost basis will be his cost basis. Additionally, you are also gifted "all" of his total depreciation already taken on the property, which you have to recapture and pay taxes on when you sell the property *no* *matter* *what*. The depreciation is not excluded from taxation with the "lived in 2 of last 5" rule. You "will" pay taxes on recaptured depreciation, and that depreciation recapture will increase your AGI - potentially putting you in a higher tax bracket.
Our plan is to move into the property for 2 years and then sell the property. A few questions. As we are both married and we are going to live in the house for 2 years, do we both qualify for the FULL $500k
exclusion
I can't say definitively, but I seriously doubt it. If the property is classified as a single family residence, then only one family can call it their primary residence.
will we be subjected to the non qualified use rule for the years the property was rented prior to us receiving it as a gift?
Lacking some clarification here. Rented to "US"???? Rented to both families? Is this rental property a duplex where each family paid rent to live in separate units?
Or do the years prior to receiving as a gift not count as that relates to a different owner?
Yes they count. Like I said above, when a property is gifted, "everything" is gifted, including all prior depreciation and use of the property.
When we sell will we be subjected to any depreciation recaptured that occurred from depreciation claimed prior to us receiving the property as a gift??
Yes, you will be required to recapture all prior depreciation including that taken by the giver of the gift. That recaptured depreciation will be taxed too, no matter what.
Since I get the impression the transaction hasn't occurred yet, I would highly advise all parties involved to seek legal advice of both a tax attorney and a real estate attorney. If your state also taxes personal income, then you can double that recommendation.
Your situation is complex because you're dealing with two families that rented from a blood related family member and now that family member is "giving" the property to their blood related tenants. There is nothing simple about this - especially if the property is classified as a single family residence. So in conclusion:
Seek professional help and advice *BEFORE* you make any final decisions or taken any action.
