Real estate capital gains: sale date vs recording date

[trelken]

My dad is going to "gift" me the home I have lived in for 7 years and I have paid the mortgage directly on it for those 7 years.  We plan to file the family transfer paperwork and submit "affidavit of property value" with the county soon.    Arizona is a "first to record" state so the sale record will show the transfer occurring on the day we file but the "affidavit" has a separate sale date that can be filled in and I plan to use 1/2/2015 as the sale date since that coincides with the agreement we had.  

My question is, what does the IRS use to determine the start date for me "living" there?  I want to avoid capital gains tax which is a minimum of 2 years residence and ownership.
I have spoken to several accountants and none of them  can answer this question definitively.  Thank you

[trelken · Accepted solution]

The answer is:

The timer for when ownership starts is based on the date the sale is recorded to me with the county.  This means if I want to avoid capital gains I need to "own" the property for 2 years after we record the sale/transfer to me with the county.

The 2 years of ownership and 2 years of residence (within the 5 years preceding the sale) do not have to be the same 2 years. 
This can get very complicated. You might want to read up on all the rules in IRS Publication 523, Selling Your Home, which you can download from the following link.
https://www.irs.gov/pub/irs-pdf/p523.pdf

[Critter]

Let's start with the GIFT ... he is not selling the home ... he is gifting it to you.  So no one will report a sale on the home on a tax return.

He will have to file a gift tax return to report this transaction. 

[Critter]

Now are you planning on selling it right away ?

[trelken]

I plan to sell within the next few months.  Of course I do not want to pay capital gains especially since I have been here 7 years.  And nobody has claimed the interest as a tax expense in the past 2 years.

[rjs]

If you are going to sell the house in the next few months, there is no way that you are going to meet the 2-year ownership requirement. The exact date that your ownership starts isn't going to matter. You aren't even close to 2 years of ownership.

The fact that you have lived there for 7 years doesn't help to meet the ownership requirement. The 2 years of ownership and residence are two separate requirements. You have to meet both requirements.

Claiming a deduction for the mortgage interest, or not claiming it, has nothing to do with the ownership or residence requirements.

[TomD8]

Home ownership begins on the date the deed is transferred from the seller (or donor) to the buyer (or recipient).

"Living there" for purposes of qualifying for the capital gains exclusion begins on the date the owner first lives in the home as their primary residence.

Remember that, since you're receiving the home as a gift, when you eventually sell the home you will need to know your father's adjusted cost basis in the home as of the date of the gift, in order to calculate your capital gain.  

[trelken]

For tax purposes when do I qualify as the "owner" living in the home as my primary residence?  Is it the date of the gift or the date we agreed he would sell it to me?  The cost basis will be the price he paid since he plans to gift it to me for the price he paid in 2010.  Thanks.

[rjs]

The 2 years of residence and ownership don't have to be the same 2 years. You have already lived there for more than 2 years. Your ownership begins on the date that your father actually legally transfers ownership to you. The date that you agreed to the transfer doesn't matter. The date of the affidavit of property value doesn't matter. And it makes no difference whether anyone has claimed a deduction for the mortgage interest.

[trelken]

So the 2 year "counter/timer" for ownership starts when we go to the county recorder to record the transfer, meaning I need to stay here 2 more years in order to not pay capital gains?

[rjs]

Yes, that's right.

[rjs]

Well, technically that's not exactly true. You have to OWN the house for two more years in order to avoid the tax, but you don't have to continue living there. Again, the 2 years of ownership and 2 years of residence (within the 5 years preceding the sale) do not have to be the same 2 years. If you move out, and 2 years from now you sell the house, you will still have lived there for 2 years out of the 5 years preceding the sale, even though it's not the last 2 years prior to the sale.

This can get very complicated. You might want to read up on all the rules in IRS Publication 523, Selling Your Home, which you can download from the following link.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p523.pdf">https://www.irs.gov/pub/irs-pdf/p523.pdf</a>

[trelken]

Thank you, it is not what I had hoped for but I understand it now.