Is my son liable for taxable gain on the house he bought for me or it can he claim it as his primary home for taxes, if he owned no other house

[rottenmomma]

In 2009 my son bought a townhouse in NC for himself (if he attended grad school there) and for me. It had 3 floors and the plan was to finish the unfinished basement for me. Then he decided to go to grad school in PA. I lived there the entire time until it was sold in 2018.  My son, kept his belongings there, had utilities in his name,  got mail there, had a car registered there, etc.  But in  2012, after he completed his degree, he went back to CA, and rented an apt., married 3 years ago, and bought a house there 2 years ago. I lived upstairs in his NC house and turned the basement into an income property. In 2018 we sold the house in NC and he bought a house in OR for me because my health has declined and I needed to be closer to him.

Someone advised me that he can't claim this house as a primary. I looked at Pub. 523 and it looks like if that is so,  there are several exceptions allowing a  partial exclusion - like health related, or unforseen events.  If he needs to rely on that then he should get a prorated exclusion for the amount of time he spent in NC over the last 5 years.

Also Pub 523 says 2 years - but not 2 calendar years, so does that mean the equivalent of 24 months or 730 days? 

He will claim the basement as an income property and I am not sure how to divide the gain. The total gain on the house is $84,000 after improvements of $25,000 in the main portion and $30,000 for the basement. The basement constitutes apx. 19% of the square footage of the house - so there is no gain.

If anyone has any insight into this please help us out!

Thanks.

[PaulaM]

If your son has not lived in the home for 2 out of the last 5 years, then he cannot claim exclusion of gain. It's his second home and doesn't qualify for the gain exclusion.

The basement rental is best treated as a separate unit. So the allocated percentage of the homes original cost plus improvements to it are its basis. The sale of the rental is entered in the Rental section. The sale of the second home is entered in the Investment section.

[rottenmomma]

Thank you, Paula.

So if he spent time at the house for the equivalent of say 10 months during the 5 years he divides 24 into 10  to get to deduct 42% of the capital gains (Per Pub 523 - 'health related move for someone else for whom the home was his or her residence')?

Also to figure the basis for the rental basement do I prorate the purchase price by percentage of square feet in the basement  - and then add the $30,000 in basement improvements to get the cost basis?  Then I would divide the sale price proportionally?

Thanks, again!

[PaulaM]

To calculate partial exclusion of gain, see this chart on page 7, part B of IRS pub 523. You have to use the shortest method out of 3 for step 1 in part B.

For the basement rental, you would use the lower of the cost or fair market value of the entire home at the time the rental was placed in service. Then multiply by the rental percentage and that will give you the rental's beginning cost basis. Then you add the basement improvements to the rental's cost basis at that point. For the sales price and selling expenses, you apply the rental percentage to the amount.

[rottenmomma]

Thank you for your explaining that to me.

I am still reading the directive as meaning a congregate total of 2 years. It does not say 2 calendar years nor consecutive years and the partial exclusion is computed that way. And it does not say the 'last 5 years'. My son lived there 2009, 2010, 2011, 2012 that is 4 years of  these 5 previous years: 2009, 2010, 2011, 2012, 2013. Those are unarguably years previous to 2018. If they wanted the 'last' 5 years then they could have simply said so.

Has the IRS made a ruling on this interpretation?

Shana

[PaulaM]

The rules are 2 years (they don't have to be consecutive) of the last 5 years from the date of sale. If your son didn't live there anytime in the five years leading up to the sale, then there isn't any exclusion. Partial or otherwise.

[NCperson]

can we go back to the beginning of this thread and clarify whose name was placed on the deed when the home was purchased? It's not clear to me who really bought this home (son or mother or both together?) as the advise is really predicated on that ownership. 

If the son bought the house outright and is the sole seller, the facts don't support 2 of the last 5 years so it's subject to capital gain.

but if the mother was a part-owner, then the 2 of the last 5 years then doesn't that support that for her share of the ownership, she can avoid the capital gain (up to her share of the $250,000 exclusion) ???

[ScruffyCurmudgeon]

The eligibility as to "RESIDENCE" - meaning that an owner meets the requirement of having resided for not less than 24 months within the past 5 years is detailed here as to how to calculate whether or not eligibility is met.  The unanswered question is whether or not the son was the only named owner (on the deed), because given that if the son was married at any of the time when he owned the house there are further implications regarding the spouse not being a resident):

Eligibility Step 3—Residence
"Determine whether you meet the residence requirement. If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion."

Separate from this is the point that it appears that the house was never in the past five years the primary residence for the owner and claiming this house as the primary residence precludes the son from also claiming any other house as his primary residence during the relevant time period.  So conclusion would be that the house must and should be totally treated as investment property, with no residential exclusion on gain, but instead should have  been reported as depreciable real property.

[rottenmomma]

My son was the only title holder of the house. Reading Pub 523 loosely - nowhere does it say 2 of the 'last' 5 years. We all arrive at that by assumption. The word 'previous' does not equal 'last' and in this case it probably matters very significantly.

If that has not been challenged in court - nor can be challenged in court then couldn't the partial exclusion could apply to the same affect.?It states that 'if the main reason for your home sale was a .....health issue then one qualifies for a partial exclusion. It goes on eot say on page 6: 'you meet the requirements for a partial exclusion if a health related  event occurred during your time of ownership and residence in the home... and that includes 'anyone else for whom the home was his or her residence'. I lived there the entire time and had a decline in my health requiring me to move.

Using the chart on page 7 I computed the time of residence for my son. I am not sure what are those requirements.He kept all of his personality in the house (his other residence was a rental), he paid all the utilities at the residence, had a car registered at the residence, got mail at the residence, (was not registered to vote), and spent a good amount of time there, making improvements. I would guess that it constituted  about 10 months out  of the 5 year period. That comes out to be a ratio of 42% of his time.

The 3rd part about 'the time that elapsed between the sale and date you last sold a home which took the exclusion' doesn't apply (this was his first home). Right?

I hope that I didn't make a mistake - my son doesn't have the savings to pay a tax on this - and I certainly don't  (I am on benefits and penniless).

[ScruffyCurmudgeon]

Qualifying for the Exclusion (https://www.irs.gov/taxtopics/tc701)

In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

NOTE Again:  The house must be treated as investment property (forgetting this argument about whether or not his partial and incomplete use or not of the house even applies) and should have been depreciated over the time of ownership when the father occupied the house and thereafter until the time of the sale.  Failure to report the depreciation does not eliminate the required accounting for the depreciation which must be used to discount the cost basis upon the sale.

[tagteam]

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@rottenmomma wrote:

It states that 'if the main reason for your home sale was a .....health issue then one qualifies for a partial exclusion. It goes on eot say on page 6: 'you meet the requirements for a partial exclusion if a health related  event occurred during your time of ownership and residence in the home... and that includes 'anyone else for whom the home was his or her residence'. I lived there the entire time and had a decline in my health requiring me to move.

You have already received accurate and complete responses to the other issues in your original, and follow-up, questions but you have to understand in order to qualify for a health-related exception it would have been your son, as the owner of the property, that would have had to move (in order to care for you) and not you, as the non-owner who needed care.

See https://www.irs.gov/publications/p523#en_US_2018_publink100073098

Treas. Reg, §1.121-3(d)

[NCperson]

Note that the word “previous” is preceded by the word “the” so it means the 5 years just prior to the sale. The word is not preceded by the word “any”

Further, the argument about the sale being precipitated by illness/ disability is based on the “use” AND “residence” by the owner (your son) , which is one of the reasons I raised the clarification of who actually owned this property....if he had lived with you all these years then that would have been different

Lastly, as you can have only one primary residence, how could he have purchased a home with his spouse and lived with her and THAT not be his primary residence?

Sorry, but suggest your son sit down with a CPA and straighten this out

[ScruffyCurmudgeon]

YUP!

[rottenmomma]

OK - it is sinking in. I have created a bad situation with no way out - YUCK!

Do you think that the IRS might be willing to do a compassionate compromise? If it is possible I will ask him to try. Thanks - all.

[rottenmomma]

As to the house - he only bought that one 2 years ago (or  a year before the sale of my NC home).