Do we qualify for $250,000 capital gains tax exemption when selling home after adding my name to title recently?

The capital gains exclusion for your primary residence has two main requirements - you need to have owned AND lived in the home as your main residence for at least 2 out of the last 5 years before selling. These don't have to be the same 2 years or consecutive. In your situation, your mom clearly meets both requirements (owned and lived there 10+ years). You meet the residency requirement (lived there 10+ years) but not the ownership requirement (only owned since May). However, there's good news! The IRS allows partial exclusion in certain circumstances when you're forced to sell before meeting the 2-year requirement due to unforeseen circumstances like unemployment or health conditions - which you both have experienced. Your mom should definitely qualify for her full $250K exclusion on her portion of the gain. For your portion, you should qualify for a partial exclusion based on how long you've owned it, plus potentially more due to the unforeseen circumstances provision. I'd strongly recommend consulting with a tax professional to properly structure the sale and maximize your exemptions, but there are definitely options available to minimize your tax burden in this situation.

After dealing with a similar capital gains headache last year, I discovered taxr.ai (https://taxr.ai) and it was a lifesaver for analyzing property sale tax scenarios. I uploaded my docs and answered a few questions, and it showed me several options I hadn't even considered for minimizing the capital gains hit. Given your complicated co-ownership situation and the timing issues with the 2-year rule, it might really help you see the different ways this could be handled. It breaks down exactly how the partial exemptions work and runs calculations based on different scenarios. In my case, it showed me how to document my unforeseen circumstances claim properly, which ended up saving me thousands.

Just wanted to follow up about the taxr.ai site someone recommended above. I gave it a try and it was really helpful for my situation with my son on the title! It analyzed our specific scenario based on the timeline of when I added him, ran the numbers for different selling dates, and showed exactly how the partial exemption would work. It also showed us how to document my medical issues as qualifying circumstances. The best part was that it showed us how structuring the sale a certain way would maximize the exemption we'd qualify for. We're actually waiting 3 more months to sell based on the analysis, which will increase our partial exemption significantly. The documentation guidelines it provided are super clear, much better than the confusing IRS publications I was trying to decipher!

If you're going to file for the partial exemption based on unforeseen circumstances, you might need to speak directly with the IRS to verify your specific situation. I tried calling them for weeks about a similar issue last year and could never get through. Eventually found https://claimyr.com (there's a demo video at https://youtu.be/_kiP6q8DX5c) which got me connected to an actual IRS agent in about 15 minutes when I'd been trying for days. Since your situation is somewhat complex with the co-ownership and the partial exemption claims, you might want to speak directly with the IRS before filing. They can tell you exactly what documentation you'll need and how to properly calculate the exclusion in your specific case. When I called, the agent walked me through exactly what forms I needed and how to document my partial exemption claim.

I need to eat my words about that Claimyr service. After my skeptical comment I decided to try it anyway because I was desperate to talk to someone at the IRS about my capital gains issue from a house sale. It actually worked! Got a call back in about 35 minutes (was expecting hours) and talked to a really helpful IRS agent who clarified exactly how the partial exemption works in my case. Saved me from making a major filing mistake that would have cost thousands. The agent confirmed that job loss and health issues absolutely qualify as unforeseen circumstances and walked me through exactly what documentation I needed to include with my return. Definitely worth it when dealing with something as potentially expensive as capital gains on a home sale.

Something nobody mentioned yet - if your mom is over 55, there's an additional capital gains exemption that might apply in your state (not federal). My parents were in a similar situation and they got additional tax relief through our state's senior property tax programs. Also, make sure you're tracking all the improvements made to the house over the years. Those get added to your cost basis and reduce the taxable gain. Things like a new roof, HVAC, renovations, etc. My parents found almost $43,000 in improvements over the years which significantly reduced their taxable amount.

Has anyone mentioned the "ownership test" exception? I think there's something where if one spouse meets requirements and the other doesn't, you might still qualify. I know OP isn't talking about spouses, but there might be a similar provision for family members? Not sure tho.

One thing that might help your situation is the "step-up in basis" rule if your mom passes away while you still own the property together. I know that's not something anyone wants to think about, but it's important to understand all your options given your difficult financial situation. Also, have you considered doing a 1031 exchange? If you're buying another property immediately, you might be able to defer the capital gains entirely. The new property would need to be of equal or greater value and you'd have strict timing requirements (45 days to identify replacement property, 180 days to close), but it could completely eliminate your current tax burden. Given that you mentioned you're planning to buy a smaller place outright, this might not work since you'd need to reinvest all the proceeds, but it's worth exploring with a tax professional. Sometimes restructuring the timing of purchases can save significant tax dollars. The unemployment and health issues you mentioned should definitely qualify for the unforeseen circumstances exception. Make sure you document everything - medical records, unemployment benefits, job loss documentation, etc. The IRS is generally sympathetic to these situations when properly documented.