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My parents bought a condo in 2005 for $75,000 and rented it out through 2015. I got married in March 2016 and moved in. I paid the HOA and property taxes to my parents.

My parents gifted this property to me in December 2017. The market value is now $200,000. I am considering selling and using the money for down payment. It is my understanding that I don't have to pay capital gains if I stayed in the property for at least 2 out of the last 5 years. When do those 2 years start, in March 2016 when I moved in, or in December 2017 when my parents gifted this condo to me?

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The clock starts at ownership as the Exclusion of Gain refers to home ownership. The fact that you resided there prior but not as a owner doesn't matter.

See IRS Pub 523 for details:

https://www.irs.gov/publications/p523#en_US_2017_publink10008937

As you've mentioned that your parents "gifted" the property and didn't mention any details of the transaction a few thoughts:

  1. Please make sure that you've legally taken title, the recorded deed is in your name. This will provide clear documentation of ownership.

  2. If the condo was a true gift without cost to you, working out the basis cost can be bit involved as you'll need adjusted cost basis of the donor, fair market value of the gift, and gift taxes paid on Form 709.

See the IRS FAQ on Cost Basis: https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/property-basis-sale-of-home-etc

  • Yes, recorded deed on my name. – Anatol Oct 7 '18 at 20:14
  • There are no gift taxes, parents used lifetime gift exclusion exemption. So, if decide to sell my condo now, what is basis cost would be: $75000 my parents paid in 2005 or fair market value when gift was recorded in December 2017? – Anatol Oct 7 '18 at 20:30
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    Yes, but how much did your parents exclude? FMV or $75000 + cost basis adjustments (new roof, new additions per: IRS Pub. 551 Basis of Assets). Right now though you've owned the condo for less than a year so you aren't eligible for the Exclusion of Gain unless you meet various unforeseen events listed in Pub 523. – Morrison Chang Oct 7 '18 at 20:47
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The home exclusion timer starts at the later of ownership or when you moved in. Since you moved in before you were the owner, the timer starts at December 2017.

Your basis in the house is the adjusted basis from your parents. The adjusted basis is $75,000 plus any additions (new roof, new deck, etc) less any depreciation taken on the home and its improvements while it was a rental.

If you sell it after the 2 year timer, you can get a $500,000 exclusion of the gain because you are married.

However, you cannot exclude any gain that is attributable to depreciation. This depreciation must be recaptured as ordinary income to you even if it was depreciation taken by your parents. Your parents tax return would have this information.

Gifting property has seriously bad tax consequences compared to bequests of the property at the death of the owner. Since they rented it out and likely took depreciation on the property for 10 years - it is likely that you will recapture at least $25,000 of depreciation income.

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