Can I defer capitol gains and keep low property 19 (CA) Tax ?

Question

I am the POA for my dad. His house has high capital gains taxes (bought it 1983) and low property 19 (CA) tax base. Can I keep property 19 tax base on a 1031 exchange ? ( I have heard no)

Could I do the 1031 exchange and rent out the house for a while and then move him back in as his primary residence and apply the property 19 tax base at that time ? I believe you have 2 years to claim the property 19 tax base and he must have lived in it for 2 of the last 5 years to qualify as a primary residence ?

Could he claim the property 19 tax base if he bought a new primary residence and also did a 1031 exchange on the original primary residence ? We are renting the property now and I know we have to meet the 1031 guidelines to do the exchange.

The motivation for the sale is he needs care right now and I would like to have a larger more functional house available for him to be cared for.

Maybe there is another method to minimize capital gains taxes that make it easier to sell and keep the property 19 tax base ? I have heard a few methods,

Thanks!

Matt Devincenzo · Answer

Let's get @Dave Foster in here...I have not heard the 'two year' restriction after purchase on all 1031s...it may only apply to related party exchanges?

While I do live in CA I haven't dealt with the 55+ issue on Prop 19, but it sounds like if he could move in prior to 2 years you could keep your prop 19 tax? If so depending on Dave's clarification above I'd buy and rent for a sufficient time and then move him in within the necessary window of time. I'd try to rent across two tax years but less than 2 total years e.g. rent this Sept until next March so you show two tax returns with rental income etc, and then he moves in and reclaims his prop 19...

That at least would be my initial plan for experts on the tax issues to poke holes in.

Kushaal Malde · Answer

You cannot 1031 a primary home. Turn it into a rental and then 1031. You cannot take section 121 exclusion if it is not a primary.

You will have to pick one path. In CA, 55+ have prop 19 on their side so that's the path for keeping low property tax basis. Or 1031 and defer taxes until death with a step up in cost basis so no taxes.

Steve Hungerford · Answer

Sorry but you have the information wrong. Dad is out. Also he buys another primary residence (different money) and keeps prop 19 on that but still does the 1031.

Steve Hungerford · Answer

The answer is this: you can be working on the house and it be considered an investment ( of course dad not living there). Therefore 1031 is in play. You can then sell and do the 1031. For prop 19 it just had to be your primary residence WITHIN TWO YEARS of the time of buying the REPLACEMENT PROPERTY. Nowhere does it say at the time of sale of the primary residence you were living there. Prove me wrong ?

I don't mean sound wrong but this place has very watered down information and really needs to step up the quality of info otherwise why post here ?

Dave Foster · Answer

@Steve Hungerford the new prop 19 2.0 is hot off the press and it's still confusing with many scenarios left out. There's been some good tidbits thrown out already here. @Kushaal Malde is correct. Your cannot 1031 that house now. It is not an investment property. And he describes the answer perfectly - Move out. Rent for a year. Then your dad would qualify for both the $250K tax free exemption (because he lived in it for 2 out of the 5 years prior to selling). And he could 1031 the remainder because it is an investment property when he sells it thus qualifying it for 1031 treatment.

This would solve your capital gains issue. And give him 250K tax free and all the rest tax deferred. Part one looks good.

But after completing this I don't think the prop 19 2 year thing will work for his 1031 replacement property. Since his intent has to be to use that property for investment use. And since he is selling an investment property to do the 1031

What would be worth investigating would be to buy a house for him when he moves out of the current one. Within two years you will be then selling that property. So that would meet the 2 year calendar. And technically he would be selling his primary residence (at least a property that qualifies for the 121 primary residence exemption. I kind of think there might be an opportunity for that two year transfer to work. But I can't say for sure at all. I'll bet there's a whole gaggle of attorneys licking their chops to get into this one.

To be clear what Kushaal was proposing would is a conversion for your dads primary to a rental and then a sale while it would qualify for both 1031 and 121. If you buy the right replacement in the 1031 and are patient your dad can late reverse convert from investment to primary. Tax problem - solved. Prop tax - maybe or maybe not with these new regs. It's an intriguing question.

Steve Hungerford · Answer

You missed the point on everything. You state the obvious about it being a rental for a 1031, pretty obvious. Not trying to take 121, again you missed everything. The answer after research is yes there is a way to keep prop 19 and do a 1031.

Steve Hungerford · Answer

I am trying any way to avoid Capital gains taxes exceeding well over 250K. The home was bought in 1983 and for very little. A bigger and better house would be great. He also has really low property taxes to consider.

It seems we are boxed in to keeping a very old and dysfunctional house. He needs care too and the house is not ideal for that.

Julio Gonzalez · Answer

@Steve Hungerford If your dad is selling his current primary residence to buy a larger primary residence, there are no capital gains assessed on the first $250,000 of profit and wouldn't need/qualify for a 1031 exchange. Are you trying to also have a rental property or just get him into a larger home?

Steve Hungerford · Answer

The property tax savings is pretty big too, especially when factored over time and can be passed on to different generations.

Can I defer capitol gains and keep low property 19 (CA) Tax ?

Can I defer capitol gains and keep low property 19 (CA) Tax ?

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