[Mary]

We unexpectedly received an offer on a rental property. It’s a “make me move” type of price. Of all of our rental properties, this is one I can see either my kids or myself living in someday if necessary. (It’s very close to a college campus and where my teens anticipate going.)

If our kids live in it someday, would that negate the capital gains tax? Do our kids count as “living in the house 2 out of the past 5 years?”

[Natalie]

A rental converted to a primary home has non-qualified use, meaning even if occupied as a primary home…the gain attributed to the years before it was a primary don’t qualify for the 121 exclsuion.

If it’s been a rental for 8 yeras, then it’s moved into and occupied as a primary for 2 yeras…only 20% of the gain will qualify as tax-free under the 121 exclusion.

I would NOT add them to title now, as they will face that non-qualified use issue.

There is POTENTIALLY an option for you to gift it fully to the children and them avoid the non-qualified use rule (as they woudln’t havehad ownership while it was a rental). However, if you are planning to maintain any portion of ownership in the property it will never qualify for the full 121 exclsuion, your gain will always be prorated based on the non-qualifed time (years during which it was a rental).

[Leonard]

Are there names on the deed? In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You’re eligible for the exclusion if you have owned and used this home as your main home for a period aggregating at least two years out of the five years prior to its date of sale.

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