Question About Capital Gains on House Sale

[Cortiz108]

Hoping for some advice here. I'm new, so go easy on me!

My wife and I sold a family house last year, which I'll call House A. By "family" I mean that my mom lived in it most of the time over the 7 years that we owned it, while we lived in her house - House B- because it was bigger. Both houses are in the same city, and nobody paid anybody rent.

My wife and I did live in House A for a total of the 2+ years out of 5, as required to not pay property tax. Part of that time was to look after my mom when she was sick, but mostly it was when we temporarily swapped and she came back to House B. That was so we could fix up House A for selling (twice, because she changed her mind the first time), and because she was cold there in winters.

But, because it was family, it was all very casual. My wife and I never "officially" lived in House A in the sense that we never changed our address on anything. Drivers license, utilities, banks, insurance, etc. all had the House B address on them for the whole 7 years (and still do).  I think the only thing with my name on it at House A was the title deed and maybe one of the two insurance policies. Perhaps most crucially, our tax returns were also always filed with the House B address. To complicate matters further, my wife and I both work from home and for most years we took deductions for a home office and a home studio at House B (House A is much smaller, and has one home office about the same size as one in House B).

So my question is, if I claim that my wife and I lived in House A for a total of 2 years out of the required 5, are they going to want me to prove it? And if I can't prove it - which I really can't - what happens then?

Should I just bite the bullet and pay the capital gains?

Thanks.

[Mike9241]

So my question is, if I claim that my wife and I lived in House A for a total of 2 years out of the required 5, are they going to want me to prove it? And if I can't prove it - which I really can't - what happens then?

whose name was on the title.

say all 3 of you. then your mother may need to report part of the sale based on her ownership %. 

no proof is required when you file. 

if audited and they ask and you can't prove it you'll have a taxable long-term capital gain.

who paid the utilities and other expenses of home ownership? do you have neighbors that saw you in the house? 

Should I just bite the bullet and pay the capital gains?

this is a decision you'll have to make.

[AmeliesUncle]

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@Cortiz108 wrote:

My wife and I did live in House A for a total of the 2+ years out of 5, as required to not pay property tax. Part of that time was to look after my mom when she was sick, but mostly it was when we temporarily swapped and she came back to House B. That was so we could fix up House A for selling (twice, because she changed her mind the first time), and because she was cold there in winters.

My wife and I never "officially" lived in House A in the sense that we never changed our address on anything. Drivers license, utilities, banks, insurance, etc. all had the House B address on them for the whole 7 years (and still do). 

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The rule is not that you merely "live" in that house, that the house must be your "Principal Residence".  Based on what you said, it seems doubtful if that was your "Principal Residence".

[Cortiz108]

@Mike9241 

My name only is on the title.

When you say "audited" do you mean they will specifically for proof of the 2-year residence claim, or will it be like a full-on investigation of all my finances, claims etc.  Not that I have anything to hide, but people always make the "audit" word seem really scary....

My mom paid the utilities, insurance, and usually the property tax except in years she couldn't afford it (she went bankrupt). I paid all the major repairs - lots of heating and plumbing issues.

I was over there a lot so neighbors saw me around sometimes, but I never told them when I was actually staying over there.  It was a pretty private place, though, so not a lot of interaction.

[Mike9241]

it's at the discretion of the IRS what to look at if they audit your return.