I have a unique situation. My mom bought a house and put it in her name since I didn’t qualify. I’ve been living in it for 5 years and paid her the mortgage and property taxes every month and she paid them directly. I just finally bought it from her a few months ago but now I would really like to sell and use the equity for a down payment on a new house. I know you have to live in the home as a primary residence for 2 years which I have far exceeded but the whole time it was under my mom’s name nothing was in my name except utilities. Since I have been living here for 5 years and have proof of it is it possible to avoid capital gains?
...Since I have been living here for 5 years and have proof of it is it possible to avoid capital gains?
No, because you do not pass the ownership test (two years) that would otherwise qualify you to claim the Section 121 exclusion of up to $250,000 of gain.
You might, somehow, be able to qualify for a partial exclusion (see link below) but that seems doubtful based upon the facts you provided.
As a footnote, did you pay fair market value for the house? It seems a bit odd that you would have a large gain on a house you just purchased a few months ago.
In reference to gains on the sale of your home where you did not live or own the home for at least two years during the five years from the date of sale, a Partial Exclusion May Be Available - See IRS Publication 523 Selling Your Home page 4 - http://www.irs.gov/pub/irs-pdf/p523.pdf#page=4
Health-related move. You meet the standard requirements if any of the following happened during the time you owned and lived in the home you sold:
- You moved to obtain, provide, or facilitate diagnosis, cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member.
- You moved to obtain or provide medical or personal care for a family member suffering from a disease, illness, or injury.
- Family includes:
- Parent, grandparent, stepmother, stepfather;
- Child, grandchild, stepchild, adopted child, eligible foster child;
- Brother, sister, stepbrother, stepsister, half-brother, half-sister;
- Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law;
- Uncle, aunt, nephew, niece, or cousin.
- 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 their residence.
wait, wait -- there is atleast one such in case law ( I read it a few years ago -- a California family ) -- this is equitable ownership -- the house was bought for and use of the current owner by the mother -- the mortgage , property taxes were paid by the OP and thus under equitable ownership doctorine, the house has always belonged to the beneficiary -- unless of course the mother was not actually the straw owner and actually paid for the house and therefore the transfer from mother to daughter was a sale and not just paper transfer .
@TiffanyRM can you please clarify -- give some near real figures , dates and circumstances. If this is not a case of equitable ownership then I am wrong and also you will need to consider this as a sale "not at arms length: and the ramifications thereof for both the buyer and the seller ( including reselling time restrictions for a proper arms length subsequent disposal ).
5/2014 my mom purchased the home for me for $310k. She put some repairs in and I bought it from her 6/2019 for $340k. The only reason it took so long for me to purchase was because I couldn’t qualify for the mortgage myself. And I needed to pay her back for repairs therefore we had to do a new purchase instead of a refinance and also didn’t want to wait the 6 months to put me on to title and take her off. I was paying through her the mortgage, property taxes and insurance. I’ve been the one living in the home for 5 years. In the beg I was paying the mortgage and property taxes directly then it was just easier for me to pay her monthly and for her to pay it direct because since it was her credit on the line she wanted it in autopay with her account. House is worth $525k-550k
@TiffanyRM Who was taking the deductions for the mortgage interest and property taxes, you or your Mom?
Also, you may want to read this web reference which discusses proving "equitable ownership": https://www.tradingacademy.com/lessons/article/deducting-interest-arent-owner-record/
My mom was because we asked our accountant multiple times if I could take the deductions since I was the one paying for it and he kept telling me no I couldn’t. I have that in email format where he told me I couldn’t
Unfortunately it appears you are on the hook for paying tax on the entire capital gain.
From a tax point of view, you gifted money to your Mom and she used it to pay the property tax, and she took the deduction. An owner or an equitable owner would have paid the tax directly (and taken the deduction). So it's going to be very difficult for you to prove equitable ownership.
Also, your reason for selling ("I would really like to sell and use the equity for a down payment on a new house") does not qualify you for a partial capital gains exclusion.
You may want to consult a local tax attorney, but it appears you do not meet the IRS ownership criteria either as an actual or an equitable owner, nor do you qualify for any of the allowed partial exclusions.
@TiffanyRM , I agree with @TomD8 ----- even if you could show that you were actually paying the property tax and the mortgage and that the house was purchased for your usage, the facts of whom took the deduction ( behaved as the owner ) and the purchase of the prop from your mother would make it very hard to prove your claim to be an equitable owner. If you want to be eligible for gain exclusion you have to hold off on the sale for two years from the date you acquired the prop from your mother. Please see a local tax professional / tax attorney for advice on how to accomplish your goal. Surely they will also mention that sales between relatives , even if at FMV, are always eschewed and IRS will always want to make sure that all gains are taxed and not excluded. I am indeed sorry