I’ve heard about a tax law where you don’t have to pay any tax on the gain of your primary residence if you’ve lived there for 2 of the past 5 years. Now, my parents died back in '98 and I moved in with my Uncle. I moved back into my parent’s house in January of 2002. I’m looking to sell the house sometime next year in order to buy my own home.
Now the problem is that the deed of the house still lists my father as owner. I’m involved in a lawsuit against my Uncle for misuse of my parents esate. Once the lawsuit is settled the house will be put into mine and my brothers names.
Now I guess the question I have is, for the tax break, does the house have to be in my name for all of the 2 years? Or is just living here good enough?
IANAL, but you need to do some research on what’s rather ghoulishly referred to as “the Angel of Death” with regard to taxes on capital gains. In a nutshell, if you buy a house for $100,000 and later sell it for $200,000, you have a capital gain of $100,000. Under current tax law, as long as that was your residence, you don’t have to pay taxes on that gain.
If, on the other hand, your parents paid $100,000 for the house, and you then inherited it, that “resets” the cost basis. In other words, if the house is worth $200,000 at the time you inherit it, and you then sell it for $200,000, you have zero capital gain. The fact that your parents only paid $100,000 for it is no longer relevant.
You should consult a real attorney about this, but since you’re acquiring the house by inheritance, you probably won’t have to worry about capital gains at all, assuming you sell it shortly after getting the title in your name.
Ok… Let me see if I got this right… If I sell the house as soon as it is put into my name I don’t have to pay capital gains. It doesn’t matter that my father died in '98? The price is reset when the deed is changed?
Correction to what I said above: the cost basis is reset at the moment that your father died. The long delay in getting the title into your name is what makes your situation material for a real attorney (one with experience in estates and taxes), not some SDMB clown like me!
As Early Out noted, your basis will be the fair market value of the house on the date of your father’s death. The executor of the estate should hire an appraiser to determine that value.
You will only pay capital gains on the appreciation of the house since the date of death. So if you get a stepped up basis of $200,000 and sell the house for $250,000 you will only pay tax on $50,000. The $200,000 which constitutes your basis in the house is never taxable. If the gain is a long-term capital gain, you will only pay $10,000 in tax (20%). The other $240,000 is yours to keep.
You may want to read IRS Publication 523, available at www.irs.gov. It addresses many issues surrounding home sales.
The twist, isthatsowrong?, is that the capital gains, up to a limit, are tax-exempt if the house has been your primary residence for 2 out of the last 5 years. In Hirka T’Bawa’s case, determining that seems more than a little murky.
He was living there up until 1998, moved out, then moved back in in January 2002. So, has the house been his legal primary residence for 2 of the last 5 years? Well, close (depends on when he moved out in 1998), but he didn’t “own” it - the title still isn’t in his name. Confusing, and the IRS pubs naturally don’t address these rather peculiar circumstances. Which is why I said “get a lawyer!”