Transfer of 121 exclusion from owner to the gift receiver

[Harry P]

Hello all,

Please help me answer the questions I have on 121 exclusion. I couldn't find a relevant page to answer this question. 

When a house is gifted and the owner has stayed in the house for more than 40 years,  does the 121 exclusion( 5 years own / 2 years live rule, 250K exemption for capital gain tax, gifter is single )  transfer to the gift receiver as the cost basis of the house? Or does the receiver loses that exemption if he sells the house in less than say  2 years after the gift?

e.g.: Owner bought the house at 150K, in 1980, and in 2003 he paid $215K to his ex-wife as part of the divorce settlement (valuation in 2003 was $430K), gifter has made $35K capital improvements over the last 40 years.

a. For the owner the cost basis is 75+215+35 = $325K. Is this correct? 

b. If the owner sells the house for $575K, he pays no capital gain tax. Is this correct? 

c. If the owner gifts the house and the gift receiver sells the house for 575K in less than say 2 years after the gift, does the gift receiver pay capital gain tax on $0 or $250K?

If you have a relevant link/text for this topic, please post it. 

Thank you in advance. 

[George4Tacks]

a. $150 should be $75.

b. Only if a were correct.

c. recipient has basis equal to basic of giftor, so see a. Based on your a, gain would be $250. 

IRC 121

Basis of Gift

[Harry P]

Thank you, George. I have updated the numbers based on your correction to (a).   

[BobKamman]

You're not really a tax practitioner, are you. 

But the $215K from 2003 is irrelevant and is not added to the donor's basis.  See IRS Pub  504:

Example.  Karen and Don owned their home jointly. Karen transferred her interest in the home to Don as part of their property settlement when they divorced last year. Don's basis in the interest received from Karen is her adjusted basis in the home. His total basis in the home is their joint adjusted basis.

[George4Tacks]

Good catch, I missed that.

[Harry P]

Hi Bob, 

I am a layperson. I am getting different answers from the tax guys here. So I posted this question on this forum. Can you please answer these questions for me?

a. For the owner the cost basis is 150+ 35 = $185K. Is this correct? 

b. If the owner sells the house for 150+35+250 = $435K, he pays no capital gain tax. Is this correct? 

c. If the owner gifts the house and the gift receiver sells the house for 435K in less than say 2 years after the gift, does the gift receiver pay capital gain tax on $0 or $250K?

Thank you very much!

[BobKamman]

I'll let George do it.  He's a tax expert, he's just not used to being thrown a curve by someone who doesn't belong here.  

[George4Tacks]

Greetings New User - ,

You’ve come to an Intuit site supporting tax professionals, and you may be looking for support as an individual taxpayer. Please visit the TurboTax Help site for support of the not so professional .

Have a wonderful day!

George

[Harry P]

Thanks for your help. Have a  good one!! 🙂