Capital gains

[MFK126]

I have a contract for deed on my primary residence. I am the buyer.  I have met the terms of the contract and and I am in the process of transferring the deed from the sellers name to my name.  Since the property was not in my name for the last 3 years, but there was a contract in place do I have to wait 2 years to sell it  to avoid capital gains?

[DoninGA]

Since you were not the legal owner of the property for the past three years, the two years residency date only begins on the date you become the legal owner.

[MFK126]

Hmm. Even if I've lived there with a contact for deed for 3 years?

[DoninGA]

The requirement for the capital gains exclusion requires that you have lived in and owned the property for at least two years.

[Opus 17]

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@MFK126 wrote:

Hmm. Even if I've lived there with a contact for deed for 3 years?

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I agree in part and disagree in part.  The residency requirement does not require ownership.  But ownership is a separate and absolute requirement.  You need to own the home for at least 2 years, and live in the home at least 2 years (730 days) of the previous 5 years.  You meet the residency test but not the ownership test.

If you are selling due to an unforeseeable hardship, as described in publication 523, you can qualify for a partial exclusion, which will be based on the shortest of three times:

a. how long you owned the home

b. how long you lived there as your main residence

c. how long since you last used the exclusion.

https://www.irs.gov/forms-pubs/about-publication-523

[Opus 17]

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@Anonymous_ wrote:

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On the other hand, a contract for deed is viewed as an alternative method of financing in many legal circles and the purchaser does have a form of ownership (equitable ownership) to the extent of payments made. Personally, I believe the argument a tough one to land with the IRS absent the contract being recorded at the time it was executed (which most sellers would resist).

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I will comment here that the IRS does recognize the difference between legal ownership (title) and equitable ownership interest.  For example, to deduct mortgage interest, you must be either a legal owner or have an equitable ownership interest, but to deduct property taxes, you must be the legal owner against whom the taxes are assessed.  (The specific Internal Revenue Code section for mortgage interest allows equitable ownership but the code section for the property tax deduction does not.)

Unfortunately, the regulations for the exclusion only talk about "ownership", and don't discuss contract sales or equitable ownership interests.  

https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRb467872627553f...

[Opus 17]

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@Anonymous_ wrote:

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@Opus 17 wrote:
......to deduct property taxes, you must be the legal owner against whom the taxes are assessed. 

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Do you have a cite for that proposition?

See the relevant language in Treas. Reg. §1.164-1(a):

In general, taxes are deductible only by the person upon whom they are imposed.

https://www.law.cornell.edu/cfr/text/26/1.164-1

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Yes, that is what I am referring to.  Do you know of any jurisdiction where property taxes are imposed on someone who only has an equitable ownership interest?  (For example, in re: your comments on contracts, are the property taxes imposed on the contracted buyer or the seller in that type of sale?  If the buyer, then I agree they are deductible by the buyer even if the sale is not finalized.)

[AmeliesUncle]

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@Opus 17 wrote:

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 but to deduct property taxes, you must be the legal owner against whom the taxes are assessed.  (The specific Internal Revenue Code section for mortgage interest allows equitable ownership but the code section for the property tax deduction does not.)

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That used to be my understanding as well, but I later found something that allows property tax for an equitable owner as well (however, I don't remember the specifics, so it is possible it is only under certain circumstances).  Offhand, I don't remember the source, but maybe I'll look it up later.

[Mike9241]

see this link about equitable the owner being able to deduct real estate taxes they pay

https://www.tpsacpas.com/post/uncover-hidden-tax-benefits-how-equitable-ownership-can-maximize-your-... 

the tax guides put out by Thomson Reuters come to the same conclusion.

another link

https://www.bucci-associates.com/you-may-still-be-able-to-deduct-your-mortgage-interest-even-if-you-...