Tax implications for selling two properties - Capital Gains exemption questions regarding Publication 523

Hey tax folks. Looking for some clarity on a capital gains situation that's causing me a lot of anxiety. My husband and I have owned our starter home since 2006 (purchased for $175k). In 2021, we bought a new place and converted our first home into a rental property. We're now planning to sell that starter home for about $390k, so looking at approximately $215k in capital gains. From what I've read, since we used it as our primary residence for more than 2 years within the 5-year window, we should qualify for the married couple exemption of up to $500k in capital gains. Here's where it gets complicated: My husband is listed as a co-owner on his father's house (purchased around 2002 for about $130k). His dad has been retired for over a decade and is claimed as a dependent by my husband's brother who lives with him. The father's house is now selling for roughly $530k. My husband won't receive ANY money from this sale - all proceeds will go to his father. What I'm really worried about is who's responsible for the capital gains tax on his father's house? Would his father/brother qualify for some exemption, and if so, how much? Most resources I find only mention the $250k single/$500k married couple exemptions, but I can't figure out how this works in a father/son co-ownership situation. I'm especially concerned about the "Look-back" Eligibility rules in Publication 523. My husband will have technically sold a house in the last 2 years (our rental), but his father hasn't. Could we end up owing capital gains tax on the father's house even though we won't see a dime from it?

0 coins

19 comments

Mason Kaczka

•8M

This is a classic case of why proper titling of property matters! Let me break this down for you: For your starter home: You're correct that you qualify for the Section 121 exclusion (up to $500k for married filing jointly) since you lived there 2+ years during the 5-year period before sale. Even though you converted it to a rental, the exclusion still applies since you meet the residency test. For your father-in-law's home: The capital gains tax situation depends on several factors: - Who's on the deed exactly (percentages of ownership) - Who lived in the home as their primary residence - Who's claiming the Section 121 exclusion If your husband is truly just a "convenience" co-owner who never lived there, he wouldn't qualify for the exclusion on that property. The exclusion would apply to your father-in-law if it was his primary residence (which sounds like it was). The good news? The "look-back" provision only prevents someone from claiming MULTIPLE exclusions within 2 years. Since your husband isn't claiming an exclusion on your father-in-law's home (he can't since he didn't live there), this isn't an issue. The person(s) who lived in the father's home as their primary residence for 2+ years of the past 5 years would qualify for their own exclusion ($250k for single, $500k for married filing jointly).

0 coins

Mason Kaczka

•8M

Your husband would technically be responsible for capital gains tax on his ownership percentage (50% of the gains), regardless of who receives the proceeds. When someone is on a deed, they're considered to have ownership rights and tax responsibilities that correspond to their ownership percentage. Your father-in-law being claimed as a dependent doesn't change the capital gains situation on property he owns. Dependency status affects income tax filing requirements and deductions, but capital gains on property are tied to legal ownership. This is why many financial advisors caution against adding children to property deeds without understanding the tax implications.

0 coins

Sophia Russo

•8M

I've been in a similar situation and used https://taxr.ai to help me sort through the capital gains exemption rules. Their platform analyzed my documents and tax situation regarding the primary residence rules (Publication 523) and helped me understand how the "look-back" period worked in a situation with multiple property sales. They explained exactly how capital gains would be calculated for each property based on ownership percentages and primary residence status. The analysis also covered what documentation I'd need to support each person's claim to the primary residence exclusion. It really cleared up my confusion about how the IRS views co-owned properties with different residency histories. In your case, I think they could help clarify exactly who would be responsible for what portion of the gains on both properties, especially since your husband is on both deeds but not receiving proceeds from one sale.

0 coins

Sophia Russo

•8M

They provided detailed analysis specific to my situation, including ownership percentages and how the capital gains would be allocated between co-owners. They explained that tax liability follows legal ownership regardless of who receives the proceeds, which was eye-opening for me. The service evaluated my deed documentation, residency history, and proceeds distribution plan to give specific guidance on both federal and state tax implications. They even identified potential strategies for documenting that the property was held for convenience purposes only, which can sometimes help in these multi-generational scenarios.

0 coins

Dominic Green

•8M

I just wanted to follow up after trying taxr.ai for my situation with being on my parents' deed. Wow - definitely worth it! They analyzed our documents and explained exactly how the IRS would view my partial ownership versus my parents' primary residence status. They confirmed what I was afraid of - that being on the deed for "inheritance purposes" actually creates immediate tax liability - but they also outlined specific documentation we could prepare to demonstrate the true nature of the arrangement. They even provided templates for a family agreement that could help substantiate our intent. The most valuable part was their explanation of how to properly report my portion of the sale on my taxes to avoid triggering an audit. Honestly saved me from what would have been a major headache come tax time!

0 coins

Hannah Flores

•8M

After spending HOURS on hold with the IRS trying to get clarification on a very similar situation (parents adding kids to deeds and then selling), I finally used https://claimyr.com and got through to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that when someone is listed as a co-owner but doesn't receive proceeds, they still have capital gains tax liability based on their ownership percentage. However, they explained that there are specific documentation requirements to establish "nominee" status if that was the intent (meaning the person was on the deed for convenience only). Before using Claimyr I literally called the IRS 8 times over 3 weeks and never got through. This saved me so much frustration and I actually got the answers I needed directly from the source.

0 coins

Hannah Flores

•8M

The service actually calls the IRS for you and navigates the phone tree. When they're about to connect with an agent, they call you and connect you directly to that agent. It's basically automated hold-waiting technology. You're definitely speaking with actual IRS agents, not third-party tax advisors. It's the same exact outcome as if you had waited on hold yourself, just without the hours of waiting. There's no special phone number - they're calling the same IRS lines everyone else uses, they just have technology that stays on hold so you don't have to.

0 coins

William Rivera

•8M

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it anyway out of desperation regarding my own capital gains question about property my parents had put me on the deed for. Got connected to an IRS representative in about 20 minutes, and they explained exactly how the Section 121 exclusion works with multiple owners. The agent confirmed that being on the deed as a convenience owner doesn't exempt you from capital gains tax liability, but they explained specific documentation I could submit with my return to clarify the situation. The agent also walked me through Form 8949 and Schedule D reporting requirements for this exact scenario. Would have taken me weeks to get this information otherwise. Sometimes being proven wrong is actually the best outcome!

0 coins

Grace Lee

•8M

One way to handle this that nobody has mentioned is using a Qualified Disclaimer. If your husband never intended to have an ownership interest and won't be receiving proceeds, he may be able to execute a disclaimer of interest BEFORE the sale closes. This is basically a legal statement refusing to accept the interest in the property. It needs to be done properly through an attorney, filed with the county recorder, and meet specific IRS requirements, but it could potentially remove your husband from the equation entirely before the sale happens. I did this when my grandparents put me on a deed without telling me, and it saved me from a huge tax headache when they later sold the property.

0 coins

Grace Lee

•8M

Unfortunately, a Qualified Disclaimer typically needs to be executed within 9 months of when the interest was created or when you turned 21 (whichever is later). Since your husband has been on the deed for around 20 years, this option probably won't work in your situation. There are still other approaches though. One possibility is having your father-in-law give your husband's share back to him as a gift before the sale (though this has gift tax implications). Another is to ensure proper documentation that your husband is acting as a "nominee" owner only. This would require specific language in the closing documents and proper reporting on tax returns.

0 coins

The Boss

•8M

I used TurboTax Premier last year for a capital gains situation with multiple owners (sold my parents' house where I was on the deed). It handled the basic reporting fine, but I found it didn't ask enough detailed questions about ownership intent or primary residence status for each owner. I ended up having to manually override some entries and add explanatory statements. Unless your situation is very straightforward, I'd recommend at least consulting with a tax professional who specializes in real estate transactions before trying to DIY it.

0 coins