Expert: Lori Frankfort - 2/25/2009

Question
Hello,

This is a follow up to my “Changing the name on a title deed” question and it’s regarding capital gains tax.  So if you haven’t read that first question, you probably should to avoid confusion.  Let’s say that the house is now under my wife’s name.  She continues to rent the house out while she lives with me in my house.  We want to sell the house and know that capital gains tax can be excluded ($250K/$500K) if you’ve lived in that house, as your primary residence, for 2 out of the last 5 years.  1) What facts do you need to show the IRS to ensure that you have in fact lived there for 2 years?

Thanks,
Jeff


Answer
Hi Jeff.  For the answer to the first question you will need to consult a real estate attorney or escrow agent - that is out of my field of expertise.  

As far as capital gains go, you have to be living in the house full-time (not renting it out) for at least 2 years in the previous five.  If you take the capital gains exclusion on your taxes and get audited they can ask you for utility bills and other various proofs of residency.  I've never had a client get audited on this matter, so I'm not sure how creative they get.  I do know that you can't have had any renters in the house during that time, nor can you have any utility bills or other mortgage payments, rent payments showing in your name for another residence during that same time period.  Those would be red flags, especially if they found them in the course of the tax audit (i.e. you were trying to write those off as well).

Best,
Lori