Dear Liz: I lived in a house for 45 years. During that time, my daughter and her family moved in due to the 2008 financial crisis. I have not charged her rent. However, I moved out five years ago, and her family is still there rent-free. I understand that when I sell, I will owe capital gains tax because it is no longer my primary residence. Are there any hardship rules that may help me?
Answer: Unfortunately, the IRS doesn’t consider freeloading relatives as one of the hardships that can modify the home sales exclusion rules.
Your capital gain will be calculated by subtracting your tax basis in the home from the sales proceeds, minus selling costs. Your tax basis is generally what you paid for the house, plus the cost of qualifying upgrades.
You can exclude up to $250,000 of home sale capital gains (or $500,000 if married filing jointly), but only if you’ve owned and lived in the property as your primary residence for at least two of the past five years. There is a partial exclusion for people who fall short of the two-year mark because of certain reasons, such as a work- or health-related move.
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