Wife became homeowner 1/22, mom's gift, child caregiver exclusion - Medicaid/nursing home purpose. We've lived there 10 yrs. 12/22 sale. Is $500K exclusion OK?

[dfs49]

Since my wife is owner for less than 2 years, I'm afraid $500K exclusion won't apply versus $320 capital gain.

[xmasbaby0]

Without commenting on the tax aspect just now-----have you consulted an elder care attorney regarding the gifting of the house for "medicaid/nursing home purposes?"   Are you aware of the five year clawback  (Medicaid Estate Recovery) for assets gifted to people when the elderly/ill person goes on Medicaid?   If you have not received legal advice, you need it right now.

[dfs49]

• Yes, an elder law attorney guided us on the 1/24/22 transfer of the home from my wife’s mom to my wife.  Since my wife was her mom’s live-in caregiver for 2 years or longer, Medicaid allowed her mom to make the home ownership transfer to my wife instead of my wife’s mom being required to sell the home to finance her nursing home.  My wife & I have resided in this home for the last 10 years.  We’ll sell my wife’s home in December, 2022, with a $300K+ gain above my wife’s cost basis.  We’ll file jointly/married.  The $500K tax exclusion typically requires 2 years of ownership.  Can the $500K tax exclusion be applied with only 11 months of ownership?  That is, does this Medicaid/nursing home “caretaker child exclusion” waive the typical 2 year ownership requirement?

[NCperson]

@dfs49 - please read this link from the IRS and specifically the part on "health related move" 

https://www.irs.gov/publications/p523#en_US_2021_publink10008937

read this statement in particular: 

• A doctor recommended a change in residence for you because you were experiencing a health problem.

• The above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

If you meet the requirements of the entire paragraph (I only snipped part of it), then you would be eligible for 11/24 of the $500,000 or 229,000 would be the exemption - not $500,000

also, the 'cost basis' should be what your mother-in-law paid for it plus improvements since she bought the house.  is that how you derived the estimated $300,000 capital gains? 

[dfs49]

Thank you NCperson.  My wife was gifted the home by her mom.  Her mom went into a nursing home prior to gifting.  Instead of requiring that her home be sold to finance the nursing home, Medicaid allowed her to gift the home to my wife, because my wife was her caregiver & lived with her for 2 years or longer.  (I lived there, as well.)  “Caregiver child exclusion” was applied.  My wife is selling the home after living in it for over 2 years, but after owning it for only 1 year.  Can the $500K cap gain exclusion be applied against the $300K cap gain that will be realized upon sale (even though ownership is less than 2 years)?

[NCperson]

@dfs49 -

1) The IRS residency requirement is: "If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. 

Note the 'and' in the statement above,  To pass the test your wife must have BOTH lived there for 24 months AND owned it for 24 months.  Since your wife did not own the home for 2 years, the residency test is not satisified, hence you two are not elgiible for the full exclusion

2) the decision to sell MAY not meet the IRS requirements for a partial exclusion either.  DId you read the IRS link above? You mother in law was not a resident of the home subsequent to your wife becoming the owner, so not confident you can meet the test to get the partial exclusion.  What was the motivation to sell the home? 

• A doctor recommended a change in residence for you because you were experiencing a health problem.

• The above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

3) what Medicare permits and what the IRS permits are not the same. 

4) a Local Tax CPA might be in order. 

[Carl]

In order for your wife to qualify for the exclusion, two main criteria must be met, and my bet is she doesn't meet either one.

1. Must have owned the home for a minimum of 2 years (720 days)

2. Must have been their primary residence for at least 2 of the last 5 years they owned it.

For #1, it doesn't appear your wife owned the home for at least two years.

For #2, from the way I see things, that home was not her primary residence for at least 2 of the last five years she owned it. As I'm interpreting things, the home was never her primary residence.

[NCperson]

@dfs49 - might be worth a read of this IRS document as well; while i stated above that you MAY not be eligible for the partial exclusion, this IRS document describes unforseen sitautions in more detail and a partial exclusion MAY be supportable: 

https://www.irs.gov/pub/irs-pdf/p523.pdf

read page 6

still suggest local tax help.