Sis needs help -cap gains on primary residence lived in less than 2 years?

My sister has lived in her house for 3 years, BUT the first

2 years my husband and I legally owned the home. She bought it one year ago and now wants to sell it. She has no extraoridinary reasons for wanting to sell it other than she can make some money on it due to rapid appreciation in our area. The real estate told her she doesn't have to live in a home for 2 years to get cap gain treatment on any profit she makes on her house.

What is the story? THanks.

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Reply to
Cherrybounce
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The real estate agent's advice is useless. When you sell a home for a profit you have a capital gain. We'll assume that your sister's concern is the exclusion of capital gain on the sale of a primary residence. For that to apply she must have owned the property for 2 years, so she has to wait. See IRS Publication 521.

-- Phil Marti Clarksburg, MD

Reply to
Phil Marti

Why were you and your husband the legal owners? If you were doing it to help her buy the place, you really held it in trust for her and she really was the "legal" owner even though not the registered owner.

That's occasionally right but generally wrong - and based on what you say it would be wrong in this case. But you might have an argument that your sister really was the owner for three years even though your name was on title. Stu

Reply to
Stuart A. Bronstein

Because she did not own the home for at least two years, she will have to pay tax on the gain. The real estate agent is correct, the sale of the home will be reported on Schedule D as a capital gain. If she owned the home for one year or less (from date of closing to date of closing), it will be a short-term capital gain and will be taxed as ordinary income at the regular rates. If she owned the home longer than one year, it will be a long-term capital gain and will receive favorable tax treatment, i.e. the maximum rate is 15% of the gain.

Reply to
bono9763

The general rule is that you must own and occupy the house as your principal residence for 2 out of the preceding 5 years, in order to qualify for the tax exclusion on real estate profits. The 2 years of occupancy and the 2 years of ownership do not need to be the same years, but you do need 2 of each. From what you wrote, your sister satisifies only the occupancy part, not the ownership part. In that case, she could sell the house, but the resulting capital gains would be subject to normal taxation as capital gains. If she bought more than 365 days ago, they would be long-term gains. Now, she could always move out and rent the place for a year in order to fulfill the 2-year ownership requirement before selling, since she has already fulfilled the 2-year occupancy, but that would delay the sale for about a year and include the hassles of being a landlady. Perhaps patience is the best counsel?

Reply to
Tom Russ

The story is that the real estate agent is right, but is answering a different question than the one your sister really wants to ask. There are two different issues here: (1) capital gain tax rates, and (2) exclusion of gain. (1) As long as your sister has OWNED the house for more than ONE year, any profit she makes on the house will be taxed at long-term capital gain rates. That's what the real estate agent is talking about. To get the long-term capital gain rates, it doesn't matter how long she has LIVED in the house. She doesn't even have to have lived in it at all. (2) But if she waits another year, she will be able to EXCLUDE up to $250,000 of the profit from taxation (assuming she is single). In other words, she will not have to pay any tax at all on the first $250,000 of profit. If her profit is higher than that, she will pay tax at long-term capital gain rates on the amount of profit over $250,000. This exclusion is what you are thinking of, with the two-year requirement. To get the exclusion she has to have both LIVED in the house for at least two of the five years preceding the sale, and also OWNED the house for at least two of the five years preceding the sale. She has already lived there for more than two years, but she needs another year of ownership to qualify for the exclusion. As you seem to be aware, if someone has owned and lived in a home for less than two years, it is possible to qualify for a partial exclusion if they sell the home for certain reasons. But wanting to take the profit is not one of those reasons. So if she sells now, she will get the long-term capital gain rates, but she will have to pay tax on the entire profit. Bob Sandler

Reply to
Bob Sandler

Well, technically, the information attributed to the real estate agent is accurate. However, to get the preferential tax rate that goes with long term capital gains, your sister has to have owned the home for MORE than a year. Also, from your facts, your sister does NOT qualify to exclude any of the gain under IRC Section 121.

Reply to
Bill Brown

Going to a real estate agent for tax advice is like going to a lawyer for medical advice. Stu

Reply to
Stuart A. Bronstein

I just had a thought. If she moves out but continues to own it for a total of two years, would she qualify? She would have owned it for two years, and lived in it for two years, all within the prior five years though not the same two year periods. Section 121(a) says, "Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more." Stu

Reply to
Stuart A. Bronstein

It is better to look at total return than to obsess about taxes. If the owners thinks the proerty will decline in value more than the gain exclusion, then its worthwhile to sell now. You might add the cost of holding it another year into the equation too.

Reply to
rick++

Yes, she would qualify for the exclusion. The two years of ownership and the two years of occupancy do not have to be concurrent. But this does not solve the sister's problem. She isn't interested in selling because she wants to move. She's interested in selling because she wants to take the profit now. Since she has to wait a year to sell anyway, she might as well stay in the house. Bob Sandler

Reply to
Bob Sandler

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