Is there Capital Gains?

[JM_May1986]

What is the name of your state? CA

My wife and I bought a FIRST house back in 1996.

By 1998, the FIRST house was converted into a business partnership where the clients reside in the residence, with a employed staff.

I and my wife sometimes staff there--meaning we sleep in the house in the separate staff room. This business was closed on 2006.

In 2003, I bought a SECOND house which my wife and I currently reside in.

From 1998-2003, the FIRST house was not declared as a rental, but the expense and mortgage were used as business expenses.

My wife and I started declaring the FIRST house as rental in 2003 when the partnership was converted into an LLC.

Question. If I sell the FIRST house, am I subject to Capital Gains tax?
I read that living in the House 2 years of the past 5 years is not subject to Capital Gains tax.

Question. Would serving as a staff in the business--unpaid since we are partners of the business considered living or residing in the house?

The utility bills are all under my name still in the FIRST house, and not the business name.

 

[TeddySnyder]

Ways to handle capital gain

It looks like you will have capital gains, tho there are ways to manage this.
If house #2 has been your primary residence for the last 2 years, then house #1 isn't. If it washn't your primary residence, you need to recognize all of the capital gain at time of "disposition" (see below for options).
Not sure what "not declared as rental" means, if you were deducting business expenses on part of your return. In any event, it looks like you will have capital gains.
Ways to minimize tax:
1) Do a "1031 exchange", which requires you to purchase a new commercial property and utilize an intermediary (for a fee). You just keep rolling over your basis until you sell the last property in the continuum and then pay tax on the accumulated capital gain.
2) Do a "structured sale", where you turn all or part of your gain into periodic payment income through a special type of installment sale, and just pay tax on the gain part of each payment. Truth in posting: I am a structured sale broker.

Don't forget you might have capital gain on house #2 at time of sale as well, since now a married couple can only exclude $500K in capital gain and must pay tax -- or do a structured sale-- on the rest.

 

[pojo2]

Truth in posting: I am a structured sale broker.

You are real close to violation so unless you want to get your posts removed better stop while you are ahead.

 

[Dandy Don]

Your situation should be analyzed by a CPA or tax accountant.