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 Dear
Tax Talk:
My husband and I have owned a home in Arizona for 30 years.
We have been successfully renting and taking depreciation on the home, filling
out Schedule E. Our son wants to go to law school in Arizona. He would live in
our rental home rent free and we would be paying his tuition for law school. Law
school is a three-year term. If we sell the house after that three-year time period,
we would have no rent to report or further depreciation. Could we sell the home
without paying the capital gains because a family member is living in it?
--Suzanne
 Dear
Suzanne,
An individual that sells his main home can exclude up to
$250,000 in gain from income tax; a married couple filing a joint return can exclude
double that. To qualify for the exclusion, the property has to be your main home,
not that of a dependent. A former rental property can qualify for gain exclusion
if you, as the owner, move into it and occupy it as your main home for two years.
Moving your son into the property will not change things since he is not the owner.
However,
if you gift the home to your son and he lives in it as his main home for the years
he is in law school, the property could qualify for gain exclusion for him. He
has to occupy the house as his principal residence, using it for the majority
of the year. In addition to the amount of time he lives in the home, other factors
are relevant in determining if it is his main home and not your house. Those factors
include the following.
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Qualifying factors: |
|
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| 1. | His
place of employment/schooling. | | 2. | The
location of his family members' main home. | | 3. | His
mailing address for bills and correspondence. | | 4. | The
address listed on his:
| a. |
Federal
and state tax returns. |
| b. |
Driver's
license. |
| c. |
Car
registration. |
| d. | Voter
registration card. | | | 5. | The
location of the banks he uses. | | 6. | The
location of recreational clubs and religious organizations he is a member of. |
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Note that you would have to gift
the home to him, because if you sell it to him
you'll be recognizing gain. Since you may not
be ready to give up the whole value of the home,
you may want to lend him his tuition money to
be repaid out of the sale of the property when
he graduates.
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