A person who receives real estate as gift while donor is still alive - must live in the gifted house for 2 years ?

[curious4913]

I am confused here...

It says donee receives cost basis of donor.

It also says donee receives donor's holding period in the property for determining whether a gain is long-term or short-term.

So why does donee need to live in that gifted property as his/her primary house for at least two of the last five years before selling it  to be eligible for a capital gains exclusion of up to $250,000

If donee is receiving donor's holding period and donor is eligible for 250000$ exemption (by living in that property for last 2 years)- why can't donee automatically get that exemption? @rjs @fanfare @xmasbaby0 @Opus 17 

[NCperson]

@curious4913 - because to be eligible for the exclusion, you must OWN and RESIDE in the house as your primary residence for 2 of the past 5 years.  It's two tests: a) ownership and b) residency. 

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

On page 3, you must satisfy Step 2 (ownership) and then Step 3 (residency) to qualify. 

So let's say you lived in the house for the past 2 years and the home was deeded to you yesterday, you meet the 2 year residency test, but not the 2 year ownership test.  

why isn't is 'automatic' - because it is not the way Congress passed the law. 😉

[VolvoGirl]

I think the holding period you refer to is for Investments like stocks or rental property not for a primary house sale.  A primary house sale is not long term or short term.  Different kinds of tax.  

[rjs]

To put it simply, the rules for determining basis and holding period for the sale, and the rules for qualifying for the exclusion of gain, are different, and they are completely separate from each other. You cannot apply the rules for the holding period to the exclusion of gain. Qualifying for the exclusion has nothing to do with your holding period. You have to meet the requirements for the exclusion as stated.

As NCperson said, that's the way Congress wrote the laws.

The sale of a primary home can be short-term or long-term. The rules for the holding period are the same as for stock or other investments. The sale is reported and taxed basically the same as an investment sale, but with some additional rules, such as the possible exclusion of gain.

[Opus 17]

---

@rjs wrote:

To put it simply, the rules for determining basis and holding period for the sale, and the rules for qualifying for the exclusion of gain, are different, and they are completely separate from each other. You cannot apply the rules for the holding period to the exclusion of gain. Qualifying for the exclusion has nothing to do with your holding period. You have to meet the requirements for the exclusion as stated.

---

This.  While you receive the holding period (and cost basis) for purposes of determining if your capital gain is long term or short term, you don't receive the holding period for purposes of the exclusion on sale of a personal residence.  Those two elements are controlled by different sections of the tax law and the rules are not the same.  

The simplest explanation for why congress did not add the gift holding period to the personal exclusion is that the exclusion was created to reward residential home ownership, not holding houses for investment.