Gifting home to get capital gains treatment

Dear Suzanne,
An individual that sells his main home can exclude up to $250,000 in gain from income tax; a married couple filing a joint return can exclude double that. To qualify for the exclusion, the property has to be your main home, not that of a dependent. A former rental property can qualify for gain exclusion if you, as the owner, move into it and occupy it as your main home for two years. Moving your son into the property will not change things since he is not the owner.

However, if you gift the home to your son and he lives in it as his main home for the years he is in law school, the property could qualify for gain exclusion for him. He has to occupy the house as his principal residence, using it for the majority of the year. In addition to the amount of time he lives in the home, other factors are relevant in determining if it is his main home and not your house. Those factors include the following.

Qualifying factors:
1. His place of employment/schooling.
2. The location of his family members' main home.
3. His mailing address for bills and correspondence.
4. The address listed on his:
a. Federal and state tax returns.
b. Driver's license.
c. Car registration.
d. Voter registration card.
5. The location of the banks he uses.
6. The location of recreational clubs and religious organizations he is a member of.

Note that you would have to gift the home to him, because if you sell it to him you'll be recognizing gain. Since you may not be ready to give up the whole value of the home, you may want to lend him his tuition money to be repaid out of the sale of the property when he graduates.