Primary residence capital gain tax after removing a co-owner

[lixiang]

Hi,

Me and my mom co-own a house (50-50). She has been living there as her primary residence for more than 2 years, and I live somewhere else. I plan to transfer the title to her completely. My question is in order for her to take the full primary residence capital gain tax benefit (i.e. $250K), does she need to live there for another 2 years after the title transfer or she can sell the house immediately after the transfer and qualify for that benefit? Thanks!

[Bsch4477]

She must have owned the home for 2 of the last 5 years. Ownership at the time of sale doesn’t affect that rule so she has to live in the home for 2 years after becoming a sole owner to get the maximum exclusion. 

[lixiang]

She has been a co-owner (as joint tenant on the deed) for 8 years. She also has been living there for more than 2  years. I believe that qualifies her for the max exclusion? Why does she needs to live there for another 2 years after becoming a sole owner?

[Bsch4477]

Yes. As a joint tenant she is eligible for the full $250,000 exclusion. 

[pk · Accepted solution]

@lixiang , agreeing with my colleague @Bsch4477  for his conclusion,

(a) Because she is a joint owner ( presumably  50% ownership), it can be conceptually looked upon as two separate properties, each owned fully by one owner. Thus she fulfills the ownership requirement of one of the two conceptual properties.

(b) Because she has used both "conceptual" properties as her main residence she fulfills the 2 yrs. total ownership.

Therefore under section 121  she meets  the 2+2  requirement and therefore  at this point in time she can exclude  an amount up to US$250,000 from the gain of her portion of the whole property.

(c) Now , and if the owner ( you ) transfer the ownership rights of the second "conceptual property to her,  she meets the use  requirement right away ( because she has been using the 2nd. conceptual property as her main residence ) , but she needs to own the property for two years ( from the transfer date ) to meet the ownership requirement.

 Does this make sense ?

Also note that the transfer of your half of the property to her , being larger than the  annual free gift amount, you will need to file a form 709 to recognize the gift against your own lifetime  prepaid gift/estate tax credit.

My ref. is  IRC section 121 --> 26 U.S. Code § 121 - Exclusion of gain from sale of principal residence | U.S. Code | US Law | LII /...

Is there more one of us can do for you ?

[lixiang]

@pk Thank you for the detailed explanation! Your analysis makes sense. Do you have references specifically for the co-owned scenario?

[pk]

@lixiang , No , I do not have any ref.  relating specifically to co-owned props., except for married couple co-owning property jointly ( please see  IRC section 121 ).  The best I can/could do for jointly owned property is to create  " conceptual" properties -- in your case two equal ones ( because of 50% ownership).

Is there more I can do for you ?    If there are things  that  you do not want to discus in this open forum , you can always PM me --- just no Personally Identifiable  Information.

[lixiang]

@pk , so unless my mom lives for another 2 years after the transfer, she can only claim deduction for half of the capital gain up to $250K?

[pk]

@lixiang , unfortunately that is the case.  With a look back period of five years  from the date of closing of the sale, she must have owned the property for two years and have used the property as her main residence  for a total of 730 days (to meet the requirements  imposed by IRC section 121).