Capitol Gains - selling second home
Hi all,
Wondering if there is a way to get out of paying capital gains on selling a second home for personal use. This is for my mom, who has been a snow bird in Port Richy, FL at this property for a little over 6 months each year for the last 6 years, but still maintains Pennsylvania residence status. Any insight here would be much appreciated.
@Brett Stec this is a tough one since the primary residence exemption won't apply to her and she won't be able to do a 1031 exchange since it isn't an investment property. What is her timeline to sell? Perhaps there's a way for her to convert this house to either her primary residence (For 2 years) or rent it out and use it as an investment property so she can get more creative with the sale of the property to save on some taxes.
If this isn't possible she'll want to try to offset some of the gains from the sale with capital losses as well as using any improvements and selling costs to lower her capital gains.
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Would be ideal to try and qualify for §121 exclusion - which allows you to exclude up to $250k of gain for selling your principal residence ($500k for MFJ). The property must have been her principal residence for at least 24 months out of the last 5 years (do not have to be consecutive). Whether or not it would qualify would depend on her facts and circumstances. If she lived there for "a little over 6 months each year" that is a good fact for meeting the test. IRS Pub 523 has a lot of additional info, and it lists "Where you spend the most time" as the most important factor in determining your principal residence. See below for other important factors:
Is it the address listed on your:
- U.S. Postal Service address,
- Voter Registration Card,
- Federal and state tax returns, and
- Driver's license or car registration.
Because it is the IRC - there are plenty of additional exceptions and caveats to be aware of.
Quote from @Brett Stec:
Hi all,
Wondering if there is a way to get out of paying capital gains on selling a second home for personal use. This is for my mom, who has been a snow bird in Port Richy, FL at this property for a little over 6 months each year for the last 6 years, but still maintains Pennsylvania residence status. Any insight here would be much appreciated.
If she was actually residing in FL longer than PA for each of the last 6 years she's actually been breaking the law in Pennsylvania by still claiming to be a resident there (why would she do this, since FL tax and homeowner protection laws are better in FL?). PA requires that you maintain a permanent home and be present there for at least 184 or more days per year to be considered a resident.
As for avoiding capital gains tax, don't sell the property. You could take out a note against it to access the equity if that's what you're after. Other than that, beyond 1031'ing a property, eventually anything sold for a profit is going to have to pay the tax man at some point in time.
Thank you all for the replies on this. She is trying to figure out what to do as my father just pasted away in January unexpectedly. She’s still not sure if she’s going to spend most of her time in PA or FL at this point but wanted to see what type of tax she would be paying if she did sell. Regardless, thank you all for taking the time to reply to me. Much appreciated.
Sorry to hear about your father.
If they owned the property jointly she should get a step up in basis for his half of the ownership. or if he owned it outright and she inherited it, I believe she would get a full step up.
Only an accountant would bring this up but it highlights one of the greatest tax strategies available.
Jake Drum, thanks so much for this info. I’ve never heard of this but will be looking into it for her. They did own the property outright together so this should certainly help. Much appreciated