Sale of investment property joint ownership

[Phinsup2021]

I purchased a home with my father in law in 2015.  He was considered a 1% owner and I was a 99% owner.  He has since lived in the home and paid "rent".  Technically, the property is listed as a rental property on my taxes.  If I were to transfer ownership to him, how long would he have to wait before he could sell the home and be eligible for the exemption?  He has never owned/sold a home before.

Thanks in advance for any assistance.

[DJS]

As long as you owned and lived in the home for two of the five years before the sale, up to $250,000 of profit is tax-free. And if you’re married and file a joint return, that amount doubles to $500,000. If your profit from the sale is more than that, the excess is reported as a capital gain. Just tell us about your home and the sale, and we’ll determine what, if any, of the profit is taxable and report it accordingly.

You will want to execute a quitclaim deed. 

Quitclaim deeds are most commonly used when property is transferred without a traditional sale. Examples include when property is transferred between family members (such as parents transferring a home to their children), between married spouses (after marriage when one spouse wants to add the other to the title of his or her separate property), between divorcing spouses (when one spouse will keep the home), or when property is being transferred into a living trust.

The deed transfer is done simply and there is no title search or title insurance used. It is fast and easy. Quitclaim deeds are not used for real estate sales, because the new owner receives no guarantees about the title and how valid it is.

A quitclaim deed is also used to clear up title to property, if there is an issue with someone else possibly having an ownership right in the property, he or she can be asked to sign a quitclaim to make sure the new owner has complete title.

[Phinsup2021]

Thanks for your reply.  I misstated my question.  My FIL, does currently own 1% of the property. He has lived in it for the five years, and has not paid any rent.  I have rented out the other 2/3 of the home and claimed it on my taxes as rental property.  If I were to do the quitclaim deed now, giving him 100% ownership, would the clock start over for him to exclude the gain or would his time in the property, albeit at only 1% ownership share, allow him to qualify for the full exemption?  The property will have approximately a 150k gain from sale.

[AmyC]

As a 1% owner, that is the portion he would exempt, if you sold now. If you gave him the house now, his basis in the house would be your basis plus his own basis, and the clock would start at the time of the gift.