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Does the 2-year rule apply when my Mom has Alzheimers?

August 12, 2011


From:  Marsha
Date:  31 Jan 2009

Hello,

My mother has Alzheimers and had to moved into a home just shy of 2 years ago. My brother has been living in the home. The home is in the family Trust and was re-appraised when my father passed 7 years ago for $750,000. Appears the value is now the same. We are discussing selling the home. Since my mother lived there 2 of the last 5 years, does the 2 year rule apply to the exclusion on paying capital gains on the sale? My brother says the $750,000 is “protected” against taxes regardless of how long my mother does not live there. I disagree.

Hope this makes sense.

Thanks!
Marsha

Answer

Date:  6 Feb 2009

Hello Marsha,

When your father passed away, the house received a new tax basis. If the house was owned as community property by your mother and father (through the trust), the entire basis was adjusted. Not all states are community property states, so you should discuss this with a tax consultant.

If the property wasn’t owned as community property, only the tax basis for your father’s share was adjusted and your mother’s share would continue.

The tax basis and selling expenses are subtracted from the sales price of the home to determine the gain from which the exclusion is subtracted, and the taxable gain determined.

It appears your mother qualifies as owning and using the home as a principal residence at least two of the last five years. There is also a special rule that provides if a taxpayer becomes physically or mentally incapable of self-care and owned and used the residence at least one year out of the last five before the sale, the sale will qualify for the exclusion. (IRC § 121(d)(7).) That should give you some additional time to sell the house.

Good luck!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Does the 2-year rule apply when my Mom has Alzheimers?

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