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Old 10-22-2015, 11:39 AM
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Capital Gains on a gifted primary residence

We bought a foreclosure two years ago that has been our primary residence and are now looking to sell it. My question relates to capital gains under the following situation:
  • My mother bought the house for us using an equity line on her primary residence (We used her to buy the house so we could act quickly and not have to go through the process of conventional financing if "we" were the purchaser).
  • We've lived in the house for the past two years but have not been the owner. Hence, it's still in my moms name.
  • We are now selling the property at a significant gain.
  • We'd planned on her quit claiming the property to us so we can avoid the capital gains tax as it's our primary residence.

I'm now learning we need to have "owned" and lived in the home for at least two years to avoid capital gains. The issue we have is we've lived in the home, but not owned it. We will have only "owned" it for a few months.

Does this put us in a situation we now need to pay capital gains? If so, can we back date the purchase to when we moved in to qualify for two years of ownership?

Any other suggestions/thoughts to help us avoid any tax issues?

Note...my wife and I are self employed so we show very little income and are in the lowest tax bracket.



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Old 10-23-2015, 03:33 AM
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Quote:
Originally Posted by bvirkus View Post
.[*]We'd planned on her quit claiming the property to us so we can avoid the capital gains tax as it's our primary residence.[/list]
I'm now learning we need to have "owned" and lived in the home for at least two years to avoid capital gains. The issue we have is we've lived in the home, but not owned it. We will have only "owned" it for a few months.

Does this put us in a situation we now need to pay capital gains? If so, can we back date the purchase to when we moved in to qualify for two years of ownership?

Any other suggestions/thoughts to help us avoid any tax issues?

Note...my wife and I are self employed so we show very little income and are in the lowest tax bracket.
• We'd planned on her quit claiming the property to us so we can avoid the capital gains tax as it's our primary residence.

I'm now learning we need to have "owned" and lived in the home for at least two years to avoid capital gains. >Correct;aslongas your mother quit claims it to you, she has no capital gains tax obligation, but she may owe gift tax (probably not, but she may need to file form 709 as the value of the home exceeds $14K for 2015). Note if there is a mortgage, she'd be ill-advised to give up ownership interest while she still was subject to the mortgage.When you sell you can exclude $250k or $500K for MFJ of the gain, since you meet the primary residence.

The issue we have is we've lived in the home, but not owned it. We will have only "owned" it for a few months.

Does this put us in a situation we now need to pay capital gains? =====>Then, yes; as you can see, you need to have lived(use test) in the house for at least 24 months in that 5-year period(owner test). In other words, You can use this 2-out-of-5 year rule to exclude your profits each time you sell or exchange your main home


If so, can we back date the purchase to when we moved in to qualify for two years of ownership?=====>>correct; To claim the exclusion, you need to meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have Owned the home for at least 2 years (the ownership test), andLived in the home as your main home for at least 2 years (the use test).
however, those two years do not need to be consecutive. you just have to have lived in your home for a total of 24 months out of the five years prior to the sale.

Any other suggestions/thoughts to help us avoid any tax issues?======>>UNLESS it is your primary home, you need to pay your LTCG tax on the sale of the home. Or instead of selling the home, you may convert it to rental pty as ONLY Real estate property held for business use or investment qualifies for a 1031 Exchange. A personal residence does not qualify.

Note...my wife and I are self employed so we show very little income and are in the lowest tax bracket=======>In general, your LTCG rate is 0%UNLESS your tax bracket is 25% or higher.However, the amount of LTCG can increate your tax bracket maybe higher than 25%, then your LTCG’d be 15%.



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