My wife and I have lived for 20 years in a house that both my parents own, and we pay them a very reduced monthly rental fee. They have not lived in the house for 20 years as well. The house was bought over 50 years ago for $20,000 and is now worth approximately $500,000. They have just gifted me and my wife the house. My wife and I plan to put it up for sale in early 2014. We will be asking $600,000. Do my wife and I qualify for the joint $500,000 (250,000) capital gains tax exclusion? Indeed we have have satisfied the one requirement of livin there more than 2 years, but must we have also owned the house? We have not owned it until now.

ANSWER

The BIDaWIZ Team's Answer:

Unfortunately, you cannot claim the maximum capital gain exclusion on the sale as your only meet the use test and not the ownership test. As per Internal Revenue Code Section 121, "Gross income shall not include the 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." You will need to wait until 2016 to qualify for the full capital gains exclusion. There are however exceptions to the rule in which you may be able to obtain a reduce capital gains exclusion as detailed in IRS Publication 523. Here's a link that details some of the scenarios. Please note that the exclusion also applies to New York state residents that meet the above requirements.