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Andrew A.
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Tax strategies for selling a primary residence

Andrew A.
Posted Jul 8 2018, 19:26

Hi there,

I'm brand new to real estate sales, but have been asked by an in-law for advice on selling her home (for better or worse!). We will definitely eventually engage a professional, but I wanted to check with you knowledgable folks first to make sure I have a solid strategy going into that discussion.

The house was bought >10 years ago for 800k and is now worth between 2-3.3m per Redfin and Zillow. Her husband passed away, but she has not been remarried. The mortgage is nearly paid off. If I understand it correctly, she will have to pay taxes on the selling price minus the purchase price, cost of any improvements, and 500k federal exemption.

Are there any other strategies which could be employed to reduce the tax burden? From what I've researched thus far the only option would be to rent out the house and then later do a 1031 exchange. Unfortunately, I know she is not interested in renting the place out.

Another option that I've thought of is that my wife and I could buy the house from her if she were to supply the financing (as we cannot afford a mortgage on that house now) and then we could sell the house after living in it for two years and also get the 500k federal tax deduction. However, it is my understanding that she can't sell the house at a 500k discount to us as that would be considered a gift, so this would only work if the house gained 500k over the two years we inhabited it (which is wishful thinking!). Given that housing prices are hard to estimate until they hit the market, is there a way to come up with a reasonably conservative price which would not be considered a gift?

Some other research that I did indicated that if there are multiple owners which have all occupied the house for some 2 of the last 5 years, then they all can benefit from the 500k deduction (if they are couples, 250k for individuals). Would it be possible for my in-law to sell 500k of the house to my spouse and I, use that 500k to buy herself a new cheaper house to move into, and then we all sell the original house together 2 years later for a total of 1m tax exemption?

Thanks in advance for your help. Perhaps I'm making this more complex than necessary but given the potential tax burden I'm trying to evaluate all possibilities - especially since the house is in an ideal location for my spouse and I to live there for a couple years.

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