Residence Sale

[Kram BergGold]

Aunt bought a home that her nephew lived in for 6 years. Only her name was on the deed but they had a legal document drawn up a the time of the purchase saying he owned 10%. The property cost $250,000 and will sell for $650,000 in 2016. I am okay with him reporting $65,000 of gross sales and her reporting $585,000 based on the legal document. He would then use Section 121 to pay no tax on the $65,000. My assumption is, if she gifted some of her share of the property to him now, his ownership of that part would not start till the day of the gift so 121 would not be available until 2 years have passed from the date of the gift. Does anyone see an argument for using 121 to shelter the current day gift?

[TaxGuyBill]

My first thought was that you could do the gift and get the full exclusion. I did quite a bit of digging, and unfortunately I haven't found ANY support of my initial thought. I think that you are right, that only the 10% will be eligible for the exclusion.

[Roland Slugg]

Arguments in favor of treating 100% of the house as belonging to the aunt:

1. Only her name on the deed.
2. Form 1099-S issued by the title company will report the full selling price using aunt's name and SSN.
3. Gift, if there ever really was one, was incomplete, since nephew's name was not added to title ... hence, no gift.
4. Gift tax return was (I'm guessing) never filed.

Argument against treating 100% of the house as belonging to the aunt:

1. We don't want to pay the tax.

[taxea]

Arguments in favor of treating 100% of the house as belonging to the aunt:

1. Only her name on the deed.
2. Form 1099-S issued by the title company will report the full selling price using aunt's name and SSN.
3. Gift, if there ever really was one, was incomplete, since nephew's name was not added to title ... hence, no gift.
4. Gift tax return was (I'm guessing) never filed.

Argument against treating 100% of the house as belonging to the aunt:

1. We don't want to pay the tax.

I agree with Roland. She can always give him his percentage of the proceeds in cash after she gets the distribution on the sale.

[TAXNJ]

Last two

Aunt bought a home that her nephew lived in for 6 years. Only her name was on the deed but they had a legal document drawn up a the time of the purchase saying he owned 10%. The property cost $250,000 and will sell for $650,000 in 2016. I am okay with him reporting $65,000 of gross sales and her reporting $585,000 based on the legal document. He would then use Section 121 to pay no tax on the $65,000. My assumption is, if she gifted some of her share of the property to him now, his ownership of that part would not start till the day of the gift so 121 would not be available until 2 years have passed from the date of the gift. Does anyone see an argument for using 121 to shelter the current day gift?

Agree with last 2 reply posters.

Run into this problem a lot with clients. You assumed a gift and a attorney drew up a document.

Better to use a Tax Attorney than a non Tax Attorney.

[Burke]

I think you will find if she goes to the courthouse and is able to file the "legal document" with the deed, then there may be no problem dividing as you state in the post. This is assuming it actually IS a legally worded and signed document. Was there any consideration? Was it witnessed/notarized? Did an attorney draw this document up? She may wish to consult with him regarding the matter. When dealing in real estate, it has to be in writing. I am assuming the sale has not taken place already (you say 2016) and no contract has been signed. He could not qualify for 121 unless the ownership were proven to have been in effect more than 2 years ago, so you are correct that if she gifts it to him now, it would require two years of continuous occupation by him in the future to qualify for the exclusion.