Home Sale Tax Exclusion - Quitclaim Deed

Question

I am wondering if my wife and I would qualify for the $500,000 home sale tax exclusion in this scenario.

For the past 5 years, my brother, my wife, and I were on a deed for a house.  My wife and I have lived in the house during this time.  My brother has not and has a different primary residence.  In January of this year, my brother filed a quitclaim deed transferring his interest in the house to my wife and I.

If we were to sell the house this year, would we satisfy the ownership test for the home sale tax exclusion?

JanaA · Answer

Hello Ldn906! Since you and your wife already owned your interest in the home and lived there as your primary residence for the full 5 years, you satisfy both the ownership and use tests under Section 121. Those tests apply to you as the sellers of the home, not to each fractional interest separately. So yes, the $500,000 exclusion for married couples filing jointly would apply to the total gain from the sale of the entire home, not just the portion you originally owned.

One thing to keep in mind is your tax basis in the share your brother transferred to you. When property is received as a gift (which a quitclaim deed generally is), your basis in that transferred portion is typically your brother's adjusted basis at the time of the transfer. This affects how the total gain on the sale is calculated, even though the exclusion itself applies to the full gain. If the total gain is under $500,000, this may not matter much, but it's worth knowing as you prepare.

Ldn906 · Answer

https://community.freetaxusa.com/discussion/comment/8051#Comment_8051

Thank you, Matthew.  This is very helpful.  To clarify, my brother added his entire share to ours, meaning that we own 100% of the house as of earlier this year.  Would we qualify for home sale exclusion on the entire amount of the sale?  Thank you.

MatthewD · Answer

Hi,

Based on what you've described, it sounds like you and your wife would generally satisfy the requirements for the $500,000 home sale exclusion under Section 121. Here's a breakdown of the three criteria for married couples filing jointly:

1. Ownership test - Either spouse must have owned the home for at least 24 months out of the 5 years ending on the sale date. You and your wife have owned your interest in the home for 5 years, so this is met.

2. Use test - Both spouses must have used the home as their main residence for at least 24 months out of the same 5-year window. Since you and your wife have lived there throughout, this is also met.

3. Frequency rule - Neither spouse can have claimed the Section 121 exclusion on another home sold within the prior 2 years.

The key point regarding your brother's quitclaim deed is that it doesn't affect your ownership period at all. You and your wife already owned your interest independently for the full 5 years. The transfer simply added his share to yours.

One thing to be aware of: your brother's situation is separate. Since he didn't live in the home, he generally would not qualify for the exclusion on his portion of any gain. That's something he would need to address on his own return for the year of sale.

For the full eligibility rules, IRS Publication 523 is a great resource: https://www.irs.gov/publications/p523