Section 121 and gift tax

[Roger Kim]

I'm in a somewhat unusual situation that I have questions about. I co-own a home in CA with a friend. Essentially he wanted to live in his own place but didn't have the money and I figured buying a house with him at the time was a good investment. We want to sell and I am starting to look into how I can save the most money tax wise. With appreciation and loan payoffs the past 6 years, we would have about $250k profit after closing costs at the estimated home value (doing quick math). Since my friend lived there for at least 2 out the past 5 years, he qualifies for section 121 where he can write off $250k profit from the sale of a home. Would it be legal for him to take all the money from the home sale (minus our down payments) and then gift me my share of the profits? That way I wouldn't be subject to long term capital gains tax and save a decent chunk of change.

Also, my understanding of gifts, in this case money, is that there is a yearly limit to how much you can give someone without having to fill out form 709. But if you go over, you don't actually have to pay any taxes on the gift until you go over your lifetime gift exemption which is like $13 million, which i guess the IRS tracks. Any thoughts?

[Natalie Kolodij]

A few things to note-

Loan payoff isn't part of the calculation of what taxable gain will be. 

(Sale price - selling costs) -(purchase price+ purchase costs)- renovations = taxable gain. 

Your loan amount doesn't matter. 

And no; if you own 50% and your friend owns 50% he qualifies for exclusion on 50% of the sale. 

If you transferred your ownership share to his name now he wouldn't have owned it 100% for the prior two years. 

I also reference this a lot but there's a step doctrine- basically if you're putting a step in the middle only to avoid tax...it isn't valid.