agball

This Relates to my Mother-in-law! She owns a home which she uses as a rental, not is her primary residence. She Fully owns the home which she inhereted from her parents (no mortgage). I know the tax laws say that you have to live in the home for two years before you are intitled not to pay capital gains tax (250,000) max if you live there 2 years. She is Handicapped for over 30 years and is over age 65 and wants to sell the renal home she owns.

Now My Question:

Is there any Exemtions she might have, to get around the gains tax? she does not want to live in the home for 2 years before selling

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Cynthetiq

I don't remember what the number is called but you she basically can sell the property and use the profits to buy another property thus never realizing the capital gains.

IIRC that's something she should be able to do since I've been instructed by my accountant to do the same with a rental property that I'm looking to sell.

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agball

Thanks Cynthetiq, unfortunately she needs the $$ being older and handicapped, so buying another property is not an option.

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Cynthetiq

then she's going to realize the capital gains and is going to have to pay the tax.

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j8ear

What Cyn is referring to is called a "like-kind exchange" and my attorney advised us that it was really a freaking hassle to complete. Your new 'like-kind' property possibilities must be identified before the sale of the existing rental, and only one of these previously identified properties actually being purchased would qualify. Regardless, once a property becomes a money maker (i.e. rental) it is subject to capital gains. Like-kind exchanges only delay the paying of these taxes. (in the hopes that future taxes will go down.)

I wonder if being disabled is an option to explore? Seems like a visit to a tax attorney should be in her very near future.

Either way inhereting a rental property without liability except for taxes is still essentially free money. (always look on the bright side of life ;-) ).

-bear

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agball

Thanks For the Help All!!!!!

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DDDDave

Remember too that she will only have to pay taxes on the difference between the 'stepped up basis' value and the net selling price after all expenses. Depending on how long she has owned it, the taxes might not be so bad.

If she has been depreciating the rental property she will also have to pay 'depreciation recapture' tax. She will definitely want to talk to her accountant. As long as she knows her 'stepped up basis', the tax due on sale is not that hard to calculate.

Also, tell her she is lucky she is selling now. The capital gains tax rate is 15%. This is as low as it has ever been.

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Rodney

Yeah, if you're not ready for that, it'll slip up behind you and slap you a good one. Happened to me once. Back when I had rental property I had a talk with an accountant about all this, and it's like what's been said: you have to live in the house you're selling for a couple of years before you can sell as a residence and claim the exemption. If she wanted to move into the rental and sell her current house, it would work for her. But not otherwise.

I've just heard -- on the radio, so double-check -- that there can be some ifs, ands, and buts about the two-year residency rule. Like, it just has to be two years residency out of the last five, and not necessarily sequential. But I don't think that'd help in this case, even if I did hear it right.

And as DDDave says, capital gains tax is now 15 percent, an historic low. So the pain is minimized. I can practically guarantee that the capital gains tax won't stay that low for very many more years, so now is the time to realize gains.

Just an aside: some people really make the residential exemption thing worked for them. My accountant told me about a couple that owned their own home and a rental. They wanted to build their dream home. So they sold their principal residence, moved into the rental, used the tax-free proceeds to start planning and building their house; and, when it was ready after a couple of years, sold the _rental_ tax-free and moved into the dream home. Used the proceeds to mop up existing debt and put the rest in the bank as a nest egg. All tax free. Like I said, if you can do such things, now is the time. Doubt it'll last.