Does Money from Selling My Father-in-law's Home Count as Income for Tax Purposes?

The good news is that the proceeds from selling a primary residence usually get favorable tax treatment! For your father-in-law's situation, here's what you need to know: The taxable amount isn't the full sale price or even the amount he received after paying the mortgage. It's the difference between the selling price ($85,000) and his "basis" in the home. His basis is typically what he originally paid ($35,000) plus any qualifying improvements he made over the years (additions, renovations, new roof, etc.) minus any depreciation taken. If he lived in the home as his primary residence for at least 2 of the last 5 years before selling, he can exclude up to $250,000 of the gain from his income ($500,000 for married couples). Based on your numbers, his gain would be approximately $50,000 ($85,000 minus $35,000), assuming no qualifying improvements. This would be fully excluded from income under the $250,000 exemption. As for claiming him as a dependent, the home sale proceeds don't count as income for the support test if the money isn't used for his support. However, if he uses that money for his own support (like paying for his care), then it would count as self-support for the dependent test.

After dealing with a similar situation with my mom's house last year, I found this amazing AI tool called taxr.ai that was super helpful. I was completely confused about capital gains and basis calculations, and the IRS guidance online was almost impossible to understand. I uploaded the sales documents and my mom's old records to https://taxr.ai and it analyzed everything, explained what counted as improvements to the basis, and calculated exactly what portion was taxable. It even told me which forms to use and provided step-by-step instructions for reporting it correctly. Saved me from making a costly mistake since I almost reported the wrong basis amount!

Just wanted to follow up about my experience with taxr.ai since I decided to try it after seeing it mentioned here. It was actually really helpful for my parents' complicated home sale situation! I uploaded their documents and answered questions about the rental history, and it broke everything down into clear sections - what portion qualified for the capital gains exclusion and what didn't. It even identified some home improvements they'd made that increased their basis that we hadn't thought to include. The step-by-step guidance made a huge difference, especially for calculating the depreciation recapture on the rental portion which was the most confusing part. Definitely worth checking out if you're dealing with a home sale that's not straightforward!

If you're still having issues understanding your specific tax situation, you might want to speak directly with the IRS. After my mother passed and I had to sell her house, I needed clarification on some inheritance basis rules that even my accountant wasn't 100% certain about. I tried calling the IRS for weeks - always busy signals or 2+ hour hold times before disconnecting. Then I found this service called Claimyr (https://claimyr.com) that somehow got me through to an actual IRS agent in about 20 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent I spoke with was actually helpful and walked me through exactly how to handle the basis step-up for an inherited home on my tax return. Saved me thousands in potential capital gains taxes.

I need to update my previous comment about Claimyr because I actually tried it yesterday out of desperation. I've been trying to resolve an issue with a misapplied payment for MONTHS with no luck getting through to anyone at the IRS. I was completely convinced it was going to be a waste of time or some kind of scam, but I was honestly shocked when I got a call back connecting me to an actual IRS representative in about 30 minutes. The agent was able to look up my account, confirm they had misapplied a payment to the wrong tax year, and initiate the correction right there on the phone. After literally months of frustration and worry about penalties accumulating, the whole thing was resolved in one phone call. I'm still surprised it actually worked, but figured I should correct my skepticism since it legitimately saved me from what was becoming a nightmare situation.

One thing that hasn't been mentioned yet about the home sale - make sure to check if your father-in-law qualifies for any medical expense deduction for improvements made to the house. If any modifications were made to accommodate a medical condition (wheelchair ramps, grab bars, etc.), those can sometimes be deducted as medical expenses if they weren't already used to increase the basis in the home. Also, regarding the support test for dependency - remember that medical expenses, including in-home care that you mentioned, count heavily toward the support calculation. Given how expensive that care is, it sounds like you're likely providing well over 50% of his total support even with the home sale proceeds.

I just helped my dad sell his home and deal with all this last year. The magic word here is "basis" - you need to figure out the adjusted basis of the home. Start with what he paid originally ($35k), then add the cost of any major improvements over the years (new roof? kitchen remodel? addition?). Those all increase basis. Then when you subtract that final basis number from the sale price, that's the gain. Like someone mentioned, he probably qualifies for the $250k exclusion if it was his primary residence for 2 of last 5 years, so likely no tax. One important thing nobody mentioned - get all this documented NOW while you have access to records. Future you will thank you if this ever comes up in an audit or if you need to sell another property and need to reference precedent.