Capital gain on sale of principle residence

[Scott Forbes]

I have a question regarding the IRS exclusion of taxes paid on the sale of a principle residence.

Here is the scenario: Tenant has been renting a condo for 7 years and it has been their principle residence.

The landlord has decided to sell this condo to the tenant. After the closing takes place, the title will be transferred giving ownership to the tenant. The tenant now wishes to sell this property taking full advantage of the exclusion of capital gain taxes on the sale of a principle residence as it has been their primary residence for the last 7 years. The conservative profit is estimated to be $40k.

Because the tenant is now the "owner", do they still get any credit for this being their primary residence for the last 7 years, OR does the clock get reset? I'm thinking because the tenant did not "own" the property until recently, the IRS will require the new owner must meet the 2 year criteria all over again. If this is the case and if the owner sells before the new 2 year criteria is met, to avoid the tax consequence, they would want to consider a 1031 exchange.

Your thoughts