Capital Gains Exclusion

[Scott Moe]

I own a single family home that I am currently renting out. My father is on the mortgage and title. I plan to move into the property for at least two years and then sell. My father is letting me keep any and all gains on the property once we sell. I will avoid capital gains taxes if I live in the property for at least two years, but will my father have to pay taxes on the gain even though he isn't getting any money? Obviously, I'll consult a tax professional about this, but I wanted to get some input from the BP community.

[Bill Exeter]

You can only qualify for tax-free exclusion treatment under Section 121 of the Internal Revenue Code if you OWN and LIVE in the property for two out of the last five years.  If your father is technically the owner and you are merely living there, then neither you nor he will qualify for the 121 Exclusion. 

Your father might qualify for a 1031 Exchange if you are paying him fair market rental rates, otherwise it is really a second home from your father's perspective and he is just letting a family member live there. 

You might want to discuss having your father "gift" the property to you so that would be able to say that you have OWNED and LIVED in the property for the two out of the five years, however, gifting is not always the right way to go.  I would sit down with both your tax advisor and your father's tax advisor to determine what strategy works best for both o you.