plan to sell home and keep as rental with no tax

3 Replies

young couple with spring wedding plans.  Each owns SFR as primary residence, she with 2 roommate tenants .
Plan---while they are still single,she sells her house to him,avoiding tax on any appreciated value, after wedding they live in his house and keep hers as rental.
sounds too simple--am I missing something ?

@John Pearson congrats on the wedding to the young couple!

What price is she selling it at? Will there actually be money changing hands?

Just to be sure I understand the scenario - Let's say she paid $100k for her house and now it's worth $200k. She sells it to him with a tax deduction for primary residence for $200k, and now he owns it with a basis of $200k, in case he ever wants to sell. Added benefit that he'd now get depreciation on an investment property worth $200k (less the value of the land, of course) instead of only $100k.

My concern would be whether this would constitute an arm's length transaction. Even thought they're not married yet, if the IRS could prove their close relationship at the time of the sale, I'd think it could be an issue, on the off chance that either of them is audited. To help with the issue, I think they should have the sale's price tied to a third party appraisal, and money actually changing hands.

But a qualified tax professional (assuming this is really the issue at hand) should be consulted. My response is not intended to be legal advice nor form an attorney client relationship.

@Yonah Weiss may have a good answer for you. He's a pretty smart dude.

@John Pearson , Keep it simple.  You could be treading on what the IRS calls a step transaction - particularly if she ends up taking the 121 primary residence exemption.   If she sells now and has lived in it for two of the last five years she gets $250K of profit tax free.  If you wait until you are married the property will be on your joint tax return so you'll both be owners anyway and you'll become what we call "accidental investors".  Then when you want to sell the property later you can either still get the tax free income as long as she has still lived in it for two out of the previous five.  Or you can then do a 1031 exchange if she no longer qualifies for the exemption.

thanks for your replies.

yes there would be money exchanged at near market value.

....and yes they would keep as rental as a married couple.

So the question might remain of it being an arms length transaction in the determination of the IRS.

They will get legal advice.