I have a client who purchased a home, second home for them, in 2016 for their son to live in, which he did. The parents and the son are on the title and the mortgage. The parents have taken the mortgage interest and property tax deduction each year. They sold the home in 2019. If the parents put the sale of the property on their tax return, they will incur capital gains tax, if the son puts the sale on his, he would qualify for the exclusion. However, since the parents were the ones who took the deductions, would they be required to put the sale on their return? Can you point me to any regulations about this type of scenario?
From information you provided, they jointly owned the property, they each need to report their portion of the gain on the sale of the home, you don't get to choose .
You may need to look at the deed.
Your client is a joint owner with 50% interest in home. The parents are 50% owners, and will treat the sale as an investment. If your client (son) meets test for exclusion, he will use 50% of gain for the exclusion. Who took deductions on tax return in past years has no effect. I don't know any regulation that covers this, but perhaps some one will respond that does.
Substance over form. If the parents were equitable owners of 100% of the house, they can't have their cake and eat it too. If they were deducting the interest and taxes, they must have been making all of the mortgage payments (or were they just cheating, and want to be honest now?). Who paid the utilities, upkeep and maintenance? Who else was living there?
I wouldn't assume 50/50 if there are three names on the deed. State law might determine whether ownership was actually 67/33, for example. Was there any agreement when the house was purchased? And perhaps most importantly, who got the money from the sale?