Many homeowners may pay tax when they sell their house because rapidly escalating prices have pushed gains over the exclusion limits of $250,000/$500,000. If the taxpayers and their child own and use the house for two of the prior five years, the gain exclusion increases to $750,000 (husband and wife plus the child equals three owners at $250,000 each). The child will actually get the money from his or her share of the house sale to pay for college or make other investments.
Specific Details
Jerry and Anne have a $1,000,000 gain if they sell their house. They have estimated that they will pay $125,000 of state and federal tax on the gain in excess of their $500,000 MFJ exclusion. They do not want to pay taxes as they need money from the house sale to fund their twin sons college tuition at Harvard. With their estate attorneys approval, they can gift 25% of the house to each son. As long as the sons own and use their portion of the house for at least two years before the sale, each son will have a $250,000 gain exclusion. This plan gives the family a $1,000,000 gain exclusion.
Potential Savings
If the taxpayers and their child own and use the house for two of the prior five years, the gain exclusion increases to $750,000 (husband and wife plus the child equals three owners at $250,000 each). The child will get the money from his share of the house sale to pay for college or make other investments.