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Question on personal residence capital gains tax
So, I was talking to a friend who is looking to help her father sell his house. He's owned it for many many years and it is in a nice area. The plan is that he will buy a smaller condo for himself and probably another rental out of the proceeds.
He'll have more than $250k in profit from the sale (it will actually be closer to $400k) so there will be capital gains tax due. My suggestion was that they take out a loan against the house to buy either the new condo or the rental, which would then bring the proceeds of the house sale down below $250k and avoid the cap gains tax. My friend thought I was being totally outrageous and suggesting something fraudulent! I'm pretty sure that's not the case (and it certainly wasn't my intention) but it did raise a specter of doubt in my mind... so, I am appealing to the CPAs and tax folk here. Is there anything wrong with the scenario I proposed? Thanks!
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- Qualified Intermediary for 1031 Exchanges
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@John Thedford is right. He could convert the house to a rental for up to 3 years and not lose the benefit of the primary residence exclusion while at the same time positioning him to also use the 1031 to protect the excess profit.
The rules for the primary residence are that he has lived in the property for 2 out of the previous 5 years. So if he moved out now converting the property to a rental (maybe tap equity to buy his next residence) he could sell the property as late as 3 years from now. He would do a 1031 exchange and take $250K in boot. Normally the boot would be taxable but in this case it is covered by the primary exclusion. Meanwhile the rest of the sale is covered under the 1031 exchange. He will have to recapture depreciation but that is all. The remainder of the transaction would be either tax free or tax deferred.
- Dave Foster
