Capital Gain Exclusion

Q: In 1995, my wife and I moved into a California house that was owned by my parents since the 1960s, and we lived there until Sept. 2003. A year earlier, in Sept. 2002, they added both my name and my wife's name to the deed, so it is currently owned jointly by the four of us. We are now planning to sell the house. My wife and I meet the occupancy requirement (2 out of the last 5 years) to qualify for cap. gain exclusion. For the ownership requirement, we have some questions: Would removing my parents' names from the deed (so that only my wife and I are owners) and then selling a few weeks later be sufficient to avoid any cap. gain liability? Or do their names need to be removed a certain amount of time before a sale takes place (someone suggested maybe six months)? In other words, do my wife and I need to be sole owners for any length of time in order to meet the 2-out-of-the-last-5-years ownership requirement (or is it met even though my parents were also on the deed)?

A: > In 1995, my wife and I moved into a California house that was owned by > my parents since the 1960s, and we lived there until Sept. 2003. A > year earlier, in Sept. 2002, they added both my name and my wife's name > to the deed, so it is currently owned jointly by the four of us. Apparently, you received a "gift" of half the house ownership in 2002. Your cost basis would be half the original purchase price (from the 1960's) plus half of any improvements added until 2002. Your parents should have filed a gift tax return (form 709) at the time. > We are now planning to sell the house. My wife and I meet the > occupancy requirement (2 out of the last 5 years) to qualify for cap. > gain exclusion. I agree with that. For the ownership requirement, we have some questions: > Would removing my parents' names from the deed (so that only my wife > and I are owners) and then selling a few weeks later be sufficient to > avoid any cap. gain liability? Or do their names need to be removed a > certain amount of time before a sale takes place (someone suggested > maybe six months)? In other words, do my wife and I need to be sole > owners for any length of time in order to meet the > 2-out-of-the-last-5-years ownership requirement (or is it met even > though my parents were also on the deed)? To qualify for (possibly) complete exclusion of the capital gains, YOU and your wife need to be the sole owners for a minimum of two of the five years prior to sale. That has not happened. If you sell now, the sale will be divided into two parts. Your half of the house will qualify for exclusion of HALF of the capital gain. Your parents half of the house will not qualify for exclusion, and will be taxed at normal long term capital gains rates (maximum 15%). Reply: ...although not quite the answer I was hoping to get Not to doubt you, but I have been getting different opinions, all from CPAs, on whether on not the ownership requirement has been met - anywhere from "remove my parents' names anytime prior to the sale" to "...six months prior", to your feedback, two years. At this point, we're totally confused. We'd really like to sell ASAP. Obviously, if two years sole ownership is required by my wife and I, trying to achieve that over the next two years will cause us to not meet the the two-year occupancy requirement (ends in Sept. 2006). Any clarification and additional help is greatly appreciated. .

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