Avoiding capital gains tax after ownership change?

Question

Hello all,

I have a property in Florida that I purchased and held for the last 5 years under my father's name as he lives in FL (for homestead exemption, etc.) while I live in NY. Long story short, my dad got ill and I became the guardian of his estate (along with my straw-man property). He has since moved out of the house (2 years ago) and at our probate attorney's behest it was advised to move into my name before the sale of the house. Any advice on how I can avoid that capital gains hit on this deal?

Thanks,

Hamish

Zack Giarrizzo · Answer

Hi @Hamish Odiean Jr, sounds like the BP community shared some good insights here. One thing I wanted to throw in there is considering reinvesting the profits into an Economic Opportunity Zone. Opportunity Zones can be used to minimize tax payments or even reduce to zero.

Opportunity Zones were created under the TCJA to;

• Allow U.S. investors to defer all 2018 capital gains for eight years if the profits are reinvested and held in an Opportunity Zone
• Lower the amount of capital gains taxes resulting from the sale of a capital asset by 10% or 15% if the proceeds therefrom are held for five or seven years, respectively, in an Opportunity Zone project.
• Provide for a full exemption from capital gains taxes on all future capital gains on the invested funds if an investment is held for ten years following investment.

Happy to connect if you have any questions.

Hamish Odiean Jr · Answer

I think I've just settled on the fact that I have to pay the gains. He had homestead exemption, but I'm being advised to completely remove the asset from the guardianship, in that case, not sure what else I can do other than give The Don (Uncle Sam) his cut.

Ryan Seib · Answer

I think the poster is saying the attorney is advising him to get the property out of the guardianship estate to avoid court fees, medical care, etc from eating up all of his assets while he is alive. This strategy is usually called emergency medicaid planning if I am correctly identifying the issue. Thus, medicaid would pay for his father's medical care for the duration of his life and the assets woudl be preserved as inheritence to his heirs. There are some strategies I have seen regarding certain special needs, or guardianship trusts which may accomplish something like this. But that discussion gets really complicated and I am not qualified to have it. Poster will have to ask his attorney to refer him to an attorney who specializes in trusts, guardianships, and emergency medicaid planning. In answer to the general question, if he actually transfers it from the estate, I am aware of no way to avoid capital gains since that would presumably be a taxable event. Unless the property qualifies for the homestead exemption. (In that case the proceeds from sale still come back into the estate and presumably get eaten up by guardianship costs). Also, deferring gains is not an option since he actually wants to transfer the property out, not bring in new property. He might be able to give a gift of equity of certain portion of the sale to heirs. But that is going to be limited by the gift tax rules and may not be very helpful overall.

Michael Plaks · Answer

Say your Dad bought his house at some point at $200k, and you can now sell it for $300k. Here's the snapshot of the tax consequences.

A. His estate sells it = no tax (if he just recently moved out). The money belongs to the estate.

B. He transfers it in your name, and you turn around and sell. You pay taxes on $100k and keep the proceeds.

C. The house stays in his name until he dies and then passes to you. No taxes, and you keep the proceeds.

Hamish Odiean Jr · Answer

@Michael Plaks

Thanks for the reply. My dad is alive, he had a stroke that legally incapacitated him so I became the guardian of his estate through the probate court process. The advice of the attorney was to protect me in regards to the annual guardianship asset accounting; if the house is sold and the proceeds don't remain in his estate.

Michael Plaks · Answer

@Hamish Odiean Jr

I'm confused by your wording. You say your father got "ill" and "lives in Florida." However, "estate" and "probate" usually means that your father died. Did he?

If yes, then you will not owe any taxes on the house. It's as if you acquired it at what it was worth on the day of your father's death.

If your father is alive, then the advice of your attorney can hurt you tax-wise. We will need to know the reason for his advice.