Capital Gains tax on property sale??

snakepuncess · Jan 16, 2006

What is the name of your state?Virginia

I own my childhood home of 75 acres. My parents have lifetime rights to the property, and my Dad has lived there for 30 years. He now wants to sell the property so he can move elsewhere.

My understanding of the tax situation is that I would owe the 28% Capital Gains tax on this property since I don't live there. The land is now worth about $250-300K.

If I deeded the property back to him, and he then sold it, would that satisfy the requirements for the tax relief? He hasn't "owned" it the last 2 years, but has owned lifetime rights to live there, and he has lived there. He would be tickled pink to be avoiding paying the $70K in taxes that will be owed otherwise. (Sorry, but he hates the IRS .)

Any insight? I haven't found enough info anywhere else to satisfy this question. Thanks muchly!

--Bonnie

LdiJ · Jan 16, 2006

snakepuncess said:
What is the name of your state?Virginia

I own my childhood home of 75 acres. My parents have lifetime rights to the property, and my Dad has lived there for 30 years. He now wants to sell the property so he can move elsewhere.

My understanding of the tax situation is that I would owe the 28% Capital Gains tax on this property since I don't live there. The land is now worth about $250-300K.

If I deeded the property back to him, and he then sold it, would that satisfy the requirements for the tax relief? He hasn't "owned" it the last 2 years, but has owned lifetime rights to live there, and he has lived there. He would be tickled pink to be avoiding paying the $70K in taxes that will be owed otherwise. (Sorry, but he hates the IRS .)

Any insight? I haven't found enough info anywhere else to satisfy this question. Thanks muchly!

--Bonnie

Well, I took a poll on your question with our entire practice. The consensus is that won't work. If you deed the property back to your father he is going to have to live there for two more years before he can sell the property and gain the full exclusion.

Also, unless your mother is also living, and they are together, he would still have some capital gains. The exclusion is 250k for a single person, 500k for a married couple.

snakepuncess · Jan 16, 2006

Thank you - more info...

Thanks, that is exactly what I thought.

Mom is now suggesting we do a tax-exchange: sell it, then purchase another property. But that seems to me to just be deferring the capital gains tax to some later time, unless the property we purchased we lived in for 2 years. Am I correct? I want to find a way to not have that huge chunk taken out of the profit, not just wait 'til later.

Any other suggestions that might help? We're open to all ideas at this point.

I appreciate your kind and quick response to my previous question!

--Bonnie

LdiJ · Jan 16, 2006

snakepuncess said:
Thanks, that is exactly what I thought.

Mom is now suggesting we do a tax-exchange: sell it, then purchase another property. But that seems to me to just be deferring the capital gains tax to some later time, unless the property we purchased we lived in for 2 years. Am I correct? I want to find a way to not have that huge chunk taken out of the profit, not just wait 'til later.

Any other suggestions that might help? We're open to all ideas at this point.

I appreciate your kind and quick response to my previous question!

--Bonnie

I think what your mother is referring to is a like-kind exchange. That may be a possible solution for you but you absolutely will have to involve a professional in that. Its not as simple as selling it and purchasing another property.

abezon · Jan 16, 2006

You cannot do a like-kind exchange with personal use property.

The capital gains tax rate would be 15% or 5%, depending on the owner's tax bracket.

Whether returning the property to your parents' names would help depends on when they transferred it to you. If you've been on the title for over 3 years, they'll have to own the place for 2 more years to exclude gains. They could, however, rent it out & move elsewhere now, then sell in 2 years & exclude $500k of gains.

LdiJ · Jan 16, 2006

abezon said:
You cannot do a like-kind exchange with personal use property.

The capital gains tax rate would be 15% or 5%, depending on the owner's tax bracket.

Whether returning the property to your parents' names would help depends on when they transferred it to you. If you've been on the title for over 3 years, they'll have to own the place for 2 more years to exclude gains. They could, however, rent it out & move elsewhere now, then sell in 2 years & exclude $500k of gains.

HUH????? That's so far wrong I am not even going to argue the point. Are you completely ignoring the ownership and residency requirements?????

abezon · Jan 17, 2006

No, I didn't ignore them. The residency / ownership requirements are that the taxpayers owned & resided in the house for 2 of the 5 years prior to sale. Ownership & residence do not have to be concurrent. You can rent a place for 2 years, buy it & rent it to others for 2 years & qualify to exclude gains.

The parents clearly meet the residency requirement.

As for ownership, they owned the house before it was deeded to the son. If he transferred it back to them & they sold it, they would qualify to exclude gains if they owned the house for 2 of the 5 years prior to sale. I.e., if they owned the place for 30 years, transferred it to son, then got it back 3 years later & sold it immediately, they would have owned the house for the first 2 years of the 5 year period prior to sale, & would meet the ownership requirement. OTOH, if the son owned the house for more than 3 years, they'll need to start the ownership period from the reconveyance & own the place for at least 2 years. But they don't have to live there after the reconveyance. Hence the comment about renting it out to produce income.

LdiJ · Jan 17, 2006

abezon said:
No, I didn't ignore them. The residency / ownership requirements are that the taxpayers owned & resided in the house for 2 of the 5 years prior to sale. Ownership & residence do not have to be concurrent. You can rent a place for 2 years, buy it & rent it to others for 2 years & qualify to exclude gains.

The parents clearly meet the residency requirement.

As for ownership, they owned the house before it was deeded to the son. If he transferred it back to them & they sold it, they would qualify to exclude gains if they owned the house for 2 of the 5 years prior to sale. I.e., if they owned the place for 30 years, transferred it to son, then got it back 3 years later & sold it immediately, they would have owned the house for the first 2 years of the 5 year period prior to sale, & would meet the ownership requirement. OTOH, if the son owned the house for more than 3 years, they'll need to start the ownership period from the reconveyance & own the place for at least 2 years. But they don't have to live there after the reconveyance. Hence the comment about renting it out to produce income.

The residency rule is that you must have LIVED in the home for 2 of the last 5 years. However you also had to OWN the home during the period of the residency.

You are assuming that a period of time where they did not own the home counts towards the residency requirement. It most assuredly does not.

Snipes5 · Jan 17, 2006

Do you have a cite for where it says they have to own and live in the property at the same time?

Thanks,
Snipes

LdiJ · Jan 17, 2006

Snipes5 said:
Do you have a cite for where it says they have to own and live in the property at the same time?

Thanks,
Snipes

Lets start with this:

§1.121-1. Exclusion of gain from sale or exchange of a principal residence

(a) In general. --Section 121 provides that, under certain circumstances, gross income does not include gain realized on the sale or exchange of property that was owned and used by a taxpayer as the taxpayer's principal residence. Subject to the other provisions of section 121, a taxpayer may exclude gain only if, during the 5-year period ending on the date of the sale or exchange, the taxpayer owned and used the property as the taxpayer's principal residence for periods aggregating 2 years or more.
_________________

While I appreciate the argument and the example of renting a residence and then purchasing it. I have to reject the argument of owning it, no longer owning it and then reaquiring it for the purpose of excluding gain.

There is case law out there on this subject....but I don't have time to look for it today.

davidlanderson · Jan 17, 2006

I think the IRS agrees with abezon

http://www.irs.gov/publications/p523/ar02.html#d0e1966

"Ownership and use tests met at different times. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale.

Example.

In 1996, Helen Jones lived in a rented apartment. The apartment building was later changed to a condominium, and she bought her apartment on December 3, 2002. In 2003, Helen became ill and on April 14 of that year she moved to her daughter's home. On July 12, 2005, while still living in her daughter's home, she sold her apartment.

Helen can exclude gain on the sale of her apartment because she met the ownership and use tests. Her 5-year period is from July 13, 2000, to July 12, 2005, the date she sold the apartment. She owned her apartment from December 3, 2002, to July 12, 2005 (more than 2 years). She lived in the apartment from July 13, 2000 (the beginning of the 5-year period), to April 14, 2003 (more than 2 years)."

LdiJ · Jan 18, 2006

I still can't find the case law that I was looking for on this issue....and I honestly don't have time to continue to look.

However, if a client brought this to me, I would advise the client to pay for a case study to be done on the issue.

I also want to remind everyone that IRS publications are not "authority", even on a secondary basis.

Therefore, on something involving this much money, therefore this much potential capital gains tax, you really need case law to back up your position.

Capital Gains tax on property sale??

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snakepuncess

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