Question on Section 121 capital gains exclusion

[jeromedawg]

Hey all,

Was curious about the ownership and use part in qualifying for a section 121 exclusion in my particular circumstance.

Current condo was purchased back in 2007 with my parents under a tenants in common agreement (I owned 25% and my parents owned 75% per the original deed). Their CPA advised that they should gift their portion of ownership to us as they were looking to reduce their position in real estate in general and as means to help us further etc.
The CPA suggested that I would meet and pass both the ownership and use tests for a full exclusion per section 121 - this has been my primary residence since purchasing (my parents do not live here however, and are in the Bay Area).
Anyway, we recently proceeded and first transferred it fully to my name (removing my parents' names) and then filed a second grant deed to transfer from my name to the name of our trust.

I am planning to ask my parents CPA to file taxes for the year in which we sell since he suggested this.
However, I wanted to get a second take on this as I've inquired about this with the CPA we normally use but she has been unresponsive due to a family tragedy that occurred last year. The other CPA I had help us with taxes this year said he would need to do more billable research on this and isn't sure it sounds right (since we've already retained the advice via my parents' CPA though, I figure we would just have him file for us for the year we sell).

Anyway, my parents' CPA said that this is one of those circumstances where there's no clear guidance from the IRS when it comes to percentages and ownership as it relates to section 121 exclusion and felt it wouldn't be a problem to fully exclude the gain (I'm estimating it to be probably under $20k..?) if we sell within the next year (rather than residing here for 2 more years before selling) based on the fact that I've technically owned/co-owned this since 2007 and my ownership interest just increased. He was implying that the IRS doesn't really address this type of scenario and therefore we could 'push the envelope'. As far as use is concerned, that's definitely met since this has been the principal/primary residence.

Thoughts ?

[secondcor521]

I looked a little and it seems that the actual text of the law just uses the term "own" without explaining what that means.

I think there are several reasonable positions a taxpayer could take:

1.  Ask the IRS what to do then follow their guidance.  Note that the IRS specifically disclaims that this protects you from further IRS issues - that is to say, it doesn't.

2.  Take the position that the majority of the ownership of the home is the owner of the home, since that person or persons is the one who presumably could decide whether to sell the home, and whether or not one can sell something indicates whether someone owns something.  Then do the calculations from whenever you became majority owner.

3.  Take the position that owners, like owners of a corporation or a partnership, can be minority owners, and do the calculations from whenever you became an owner, even if you were just a minority owner.

4.  Take the position that ownership is proportional, so take 25% of the credit for the period of time when you were 25% owner and 100% of the credit for the period of time when you were 100% owner.

5.  Pay your CPA to do the research for you and follow their advice.

At the end of the day, the choice probably boils down to how by-the-book you want to be and how aggressive you want to be in your position.  I generally take the most aggressive position I can as long as it meets the letter of the tax law and there is a reasonable argument that supports it, but I know others who feel differently.  It's your signature at the bottom of the tax return.