Here is a hypothetical scenario I was discussing with someone today that I think seems fishy, but I can't find much info on.
- An adult gives money to his 20 year old kid to buy a house as a gift.
- The kid lives in it, renovates it, and flips it in say half a year and pays 0 taxes due to the Principal Residence rule.
- The kid gives back the money plus the profit to the adult as a gift.
Essentially the adult is using the kid to take advantage of the principal residence tax free capital gains rule to invest and sell property.
Is this legal? If it is, it seems like this loophole could be used to avoid taxes for multiple years until the kid himself can afford a principal residence (and hence this loophole is no longer available).