500K Home Sale Exclusion for Parents

[HYC]

My parents have owned their house and have been living there for 15+ years. However since they have low income (less than $8K combined yearly), and I paid almost all the costs for their house except for some small utility bills like internet, water etc, I claimed them as dependent and they didn't file tax themselves for the past 10 years. Now they're considering selling their house and move to senior housing, will they be qualified for the $500K home sale exclusion for the capital gain? 

[DoninGA]

Yes, they will if they still are the legal owners of the home.

If you sold your primary personal residence and you lived in and owned the home for at least two years in the five year period on the date of sale, you do not have to report the sale if your gains are less then the exclusion amounts of $250,000 if filing Single or $500,000 if filing Married Filing Jointly (and both lived in the home for two years).

[HYC]

Thanks for the reply! Is there any document I need to provide to prove the 2 year/5year residency when filing the tax for them in the year they sell the house? Do they need to provide any utility bills, or should I provide my tax return (with their name as dependent to show)?

[DoninGA]

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@HYC wrote:

Thanks for the reply! Is there any document I need to provide to prove the 2 year/5year residency when filing the tax for them in the year they sell the house? Do they need to provide any utility bills, or should I provide my tax return (with their name as dependent to show)?

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No, there is nothing that they or you need to prove on a tax return since the sale will not be reported on a tax return if the gains on the home are under the exclusion amounts.

Only if a Form 1099-S is issued to them at closing reporting the sale would they have to file a tax return reporting the sale to the IRS.  There would not be any taxes owed due to the sale but the IRS requires the sale to be reported if a 1099-S is issued.  There should not be a form 1099-S issued at closing, so this is just a heads up to you if there is.

[Hal_Al]

The 1099-S is usually included with the closing papers (as opposed to be mailed the following January like most tax documents). You should mention to the closing agent that they qualify for the exclusion to try to get them not to issue the 1099-S. 

[US_Winnie]

Hi, 

I have the similar situation. I sold my primary home in April, 3. 2020 which I lived  from 2008 to 2017 and rent out during 8/15/2017~2/15/2020. When at closing I told escrow company this sale was qualified for primary home sell but I still received 1099S. So when I started to file 2020 return with Premier, I selected " sold" this rental property in 2020.   My total gain from the sell is $ 341,041 which is under 500K exclusion as join file. Somehow Premier only allow to exclude  $315228, $26013 shows " Depreciation allowed or allowable" in Disposition report (f). Then Schedule D line 15 shows $26013 Net long-term capital gain, it's also in schedule D line 19 " Unrecaptured section 1250 Gain Worksheet" . It added in Form 1040 Line 7 "Capital Gain" .  Would you be able to tell what went wrong?  or the deprecation allowance during rental time must be separated from the total gain to be tax ?  Thanks!

[Hal_Al]

@US_Winnie 

TurboTax has done it correctly.  

Depreciation recapture is technically a long term capital gain.  But, it is also a "section 1250" gain; meaning it's taxed as ordinary income, but with a cap of 25%. See the Sch D gain worksheet for tax calcs.

More importantly, the depreciation recapture part of the gain does not qualify for the home sale exclusion.