by Rob Seltzer
I inherited my parents’ home, which is worth more than my current one. I’m thinking of claiming my parents’ home as my principal place of residence so that I can sell it in two years and not have to pay capital gains. I’m changing my homeowner’s exemption on my tax bill to my parents’ house. What other things do I need to do so that I won’t have to pay capital gains taxes on my parents’ house when I sell it?
Why go to the bother of trying to provide proof of your living in your parents’ home when you could probably sell the house now and pay no or little capital gain tax? When you inherited your parents’ house, you got a step up in its basis. In other words, the fair market value (FMV) of the property on the date of the death of your last parent is its new cost basis. And if it is more beneficial to you, the government says you can select another date to lock in the FMV as long as the date is between the date of death and the nine months afterwards.
If the difference between the FMV and the price you sell the house for is not that great, the homeowner’s exemption and principal residence issues are moot. If you sell the house sometime during the nine months following your parent’s death, the price the house sells for essentially is its FMV. Thus, if you use the date of sale as the FMV date, the sale price and basis are the same, meaning there is no capital gain tax.
You could also sell your parents’ home, sell your own house and use the money realized on both to purchase another home and likely pay no capital gains. As long as you’ve lived in your current home for at least two years out of the past five years, it qualifies for the exemption on capital gain tax ($250,000 if you are single, $500,000 if you are married).
If you really want to wait two years before selling the house, you will have to physically move into it in order to claim the homeowner’s exemption when you sell it. But I don’t think that would be in your best financial interest.
Rob Seltzer is principal of Robert Seltzer, CPA, PFS, in Beverly Hills. You can reach him at (310) 278-9944(310) 278-9944.
Have a question for a CPA? Ask it here.
In accordance with IRS Circular 230, the information on this website is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.