Upon my parent's passing, I would likely selling the bigger home at which all three of us current reside and move into the condo in question. Assume the tax law does not change, if I stay at the condo for 2 year or more (i.e. using it as the primary residence), I should be able to circumvent the up to $250K worth of capital gain, correct?

ANSWER

The BIDaWIZ Team's Answer:

Based on the information you've provided, you may be able to utilize IRC Section 121 to claim a portion of the capital gains exclusion. Please note that any depreciation taken while the property was a rental will not qualify for the capital gains exclusion, and will instead be subject to depreciation recapture. In addition, the amount of the capital gains exclusion is generally allocated on a pro-rata basis in accordance with how long the property was considered qualified versus non-qualified. Renting the property is considered non-qualified use. So, if you own a property for 10 years and its a rental for 5 out of the 10 years, you may be eligible to exclude 5/10 of the exclusion. However, subject to certain exceptions, non-qualified use prior to January 1, 2009 will be ignored for purposes of the section 121. In a nutshell, this means that you inherit your mother's non-qualified use of the property as well which would limit your capital gains exclusion somewhat.