Capital gains tax on half a house?

Question

My mother and I jointly own a house in Nevada. It's her primary residence, but not mine. Is there any way to legally avoid paying capital gains tax if the house is sold either because my mother wants to move to a new house or I inherit the house someday and sell it?

Here's some background information...

In mid-2015, I bought a small house in Nevada for my mother. The house is in a seniors-only community and I'm not a senior so we had to add her name to the title to be able to buy it. I've made all the payments myself and have never collected any rent from her. It's been her primary residence since mid-2015. I live in California and have never lived in the house.

My mother is retired and collects very little from social security so I pay all of her bills. I've claimed her as a dependent on my taxes for about 8 years or so. I'll be filing my 2019 taxes within the next couple weeks and was not planning to continue claiming her as a dependent for other reasons, but I still pay her bills and have the option to do so if it helps somehow with the tax situation.

Luckily, my mother is healthy and I don't plan to inherit her half of the house any time soon, but I'd like to plan ahead for all scenarios. If I inherit her half someday and then sell the house, will I have to pay tax on all capital gains, just my half, or none of it? What if she wants to move so we sell the house and use the money to buy her a new one? Can I sign my half of the house over to her and let her sell it to avoid capital gains tax? Are there any other options that I should consider?

Answer 1

Starting from the premise that you and your mother co-own the house, you each have an equal interest in the house, so you would both separately report the sale on your taxes, reporting half of the profits. Your share would not be subject to the sale of home capital gains exclusion but since you mother has been living there, her half is most likely excludable (you can read the rules to be sure). If you transfer your interest to your mother, that is not a gain or a loss. However, transferring your interest to your mother may be complicated (e.g. the loan could become due at that point, and there is a tax form since you are giving a gift of half the value of the house, which is no doubt over $14,000. At some point, you may inherit her interest, and the stepped-up cost basis becomes half of the original cost (your basis) plus half the market value.