Q: I have been living alone in my parents' home for the last 4 years. Will they have to pay capital gains tax if they sell
Parents are still living. They have a home equity loan on this house. Due to a short sale in 2012, we cannot buy another home until 2015, so we moved into their old home while they bought a smaller place. I've read that they have to have lived here for 2 of the last 5 years to avoid the capital gains tax, but would that apply if an immediate family member was living here? If so, is there anything we can do, short of buying the house from them (because we can't get a mortgage until 2015), to avoid that tax?
A: Your analysis is correct: in order to exclude the tax on up to $500,000 of gain, your parents would have had to have lived in the house, as their primary residence, for two of the five years before the sale. Yes, the rule applies even though an immediate family member is now living in the house. There are two components to this rule: Ownership and Use. You have to own the property for two years; you have to live in it as your principal residence for two years. Those two year periods must occur some time within the five years preceding the sale date. As far as a solution, the obvious one is for you guys to switch houses for two years. It depends on how long they are willing to hang onto that house. There are other alternatives, of course, that involve gifting, trusts, and wills but addressing those items would require much more than an answer in this forum. You should speak with a tax and/or real estate professional. Good luck!
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