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How do you eliminate capital gains on a cottage?

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C

canu helpme

Guest
My retired grandparents purchased a secondary residence (cottage on lake) in the 1960's for approximately $10,000. The Wisconsin residence is now valued at approximately $240,000 (much more than their primary residence.)
They would like to sell but feel like they will pay too much tax.

1) How can they minimize or eliminate paying capital gain tax?

2) Could they eliminate any capital gains by claiming it as a primary residence? If yes, how would they prove primary residence?

3)What does the IRS look for as proof of primary residence?

Any suggestions of what they should do?

3)If they do have to pay tax. How much would they pay?



 


L

loku

Guest
Gain on Second House

You are right, they could exclude $250,000 of gain on the sale if it were their main home.

The following is quoted from IRS Publication 523, Selling Your Home (Notice that the example of a home that is not a main home is your exact situation):

If you have more than one home, you can exclude gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

Example 1. You own and live in a house in the city. You also own a beach house, which you use during summer months. The house in the city is your main home; the beach house is not.

Assuming they have put $5,000 in improvements in the property, and assuming they incur $5,000 of expense in selling the property, and assuming they hav e$15,000 of other income, their federal tax bill will be about$37,000, including the sale at $240,000.

One way for them to avoid the tax on the gain is to live in the cottage for two years, or to live in it most of the time for two years.
 
C

canu helpme

Guest
1. What would the IRS look for as satifactory proof that they lived in the cottage for more than 6 months in the last two years?

 
L

loku

Guest
Main Home

The requirement is not that they live in the house 6 months in the last 2 years. To exclude gain, you generally must have owned and used the property as your main home for at least 2 years during the 5-year period ending on the date of sale.

I don't know any special way to prove that. Use common sense. Gas and electric bills showing a lot of use. Other mail directed to them at the cottage. Testimony from neighbors. Anything else you can think of. There is no magic formula; however, the fact that their driver's licences, tax returns, and credit cards show an address, is good evidence that that is the main home.

 

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