Hello again hookman,
There are a couple of issues here. First of all, the IRS does allow a home owner to exclude $250,000 (or $500,000 if married filing a joint return) from the gain on the sale of a primary residence before any excess gain is subject to tax. However, there are two rules which first must be met. Rule 1 is you must have owned the home for at least two years. Rule 2 is you must have lived in the home for at least 2 of the past 5 years preceding the sale. You indicated that you put a home on this property a little over a year ago, so even if you were the legal owner, it does not sound like you meet Rule # XXXXX which is the 2 year ownership requirement.
But even if you did meet both rules, unfortunately, even though you may have been making the mortgage payments on this property, under IRC Section 121 which allows an exclusion amount on the sale of a primary residence, you would not qualify for this exclusion if you are not listed as the legal owner of the home.
Your purchase agreement or intent to purchase does not allow you to take this deduction.
If your mother in law owned the home and lived with you in the home for two years, then since she is also the legal owner, she would be allowed to exclude $250,000 from the gain on the sale, if she had owned the home for 2 years and lived in it for 2 years.
Also you must remember that when you sell this property, the gain from the sale must be reported on your mother-in-law's tax return since she is the legal property owner. That means that she will be the only responsible for any taxes due on the gain.
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