Legal Question in Real Estate Law in California
Capital gain tax question
I know the IRS requires a residence to be owner occupied for at least two of the last five years in order to be exempt from paying property taxes on the gain up to $500,000 for married couples. If husband wife bought the property 10 months ago through lease option to buy agreement after leasing it for 2 1/2 years, must they pay the cap gain tax? In 10/200 they signed the lease option to buy agreement and moved into the house with 100% of their lease payments to be applied to their down payment should they decide to buy. After 2 1/2 years they bought the house and now want to sell. Is there any consideration by the IRS for the time the home was leased or does the IRS only look at the time they were owners of record? They bought the home from the grandmother and that is why their lease payments were applied to the downpayment. Thank you in advance!
2 Answers from Attorneys
Re: Capital gain tax question
I have looked in the basic desktop tax guides and don't find any exception to the rule requiring ownership for lease-option occupancies. Unless you were legally committed to buy, your residency as a lessee doesn't count toward the 2 years. There is a reduced exclusion for partially-qualifying sales. See Internal Revenue Code section 121(c)(2).
Re: Capital gain tax question
This is such a good deal for homeowners that the IRS really holds you to tight restrictions. You must own and reside for 2 of the past 5 years. Leases do not count. The transaction could have been structured differently to allow for earlier ownership, but it is too late now.
The other problem is, how about your grandmother. Did she report capital gains when she sold the property to you? What was the purchase price? Why are you moving? That can impact the issue, too.
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