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How did you like the idea of avoiding some of the taxes by selling house along with some of the property to allow for a tax defferal of up to $500,000?

If you and your spouse own and live in the house for the next two years, then yes, you can exclude (not defer) up to $500K of capital gain on the sale of the house and a reasonable amount of land surrounding it. I'm no expert here, but I'm almost certain I've read that if you sell a house and a large piece of land, you divide the sale up into two pieces: a big chunk of land (on which capital gains will be due in full) and a modest chunk of land around the house (which would qualify for the $500K exclusion). And no, I don't know what modest means - maybe an acre or two? But didn't you say, in the original post, that you wanted to keep the house?

I would argue that they have to wait for two years after the date of the first 1/4-interest gift (two years ownership) and also have two years of residence (perhaps including periods before gifts began) before they can get the 500K exclusion. It doesn't have to be two years from "today". They would only have to divide the sale if they sell the property in multiple transactions. If they do divide the property, they will have to find a reasonable method for allocating basis to the parcels. Capital gains on the vacant parcels will not qualify for exclusion, the gain on the parcel with the house will qualify. They can't allocate cost basis in a fashion which leaves all the gain on the parcel with the house. Finally, any series of transactions which end with the OP still in possession of the house would likely be thrown out by the IRS as attempted tax evasion (this term NOT used in a legal sense).


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