Minimizing capital gains tax

[Anonymous]

I'm a renter in a neighborhood with few sfh available for sale. My next door neighbor moved about 7 years ago to a larger house in the neighborhood and has since had tenants renting the house next door. I approached him to see if he might be interested in selling the house to me (he bought in the 80s and it has obviously appreciated tenfold ). His dilemma (and reason for not selling at this time) is that due to the appreciation, he faces a hefty capitol gains tax bill and isn't sure of a way to avoid it. I'm curious: Is there any way to creatively minimize his tax debt or is this just an excuse to hold onto a very valuable asset? The house is small and seems to have a lot of tenant turnover and is currently empty.

[Anonymous]

He can postpone - and perhaps totally escape - cap gains taxes - if he uses the proceeds of sale to you to invest in another property via a 1031 "tax feee exchange."
(How would he escape cap gains taxes totally? Hold the replacement property until his death - at which time his basis in the new house would be marked up to its market value as of the date of his death.)

[Anonymous]

No, only way to minimize is to move back in for two years. If he's married he can exempt $500k which is only $100k of tax. If single, $250K so $50k of tax.

[Anonymous]

your neighbor could

1) roll his investment into another qualifying property via a 1031 exchange. this defers, but does not eliminate the sting of capital gains tax until he dies at which point, under current law, the basis in the property will "step up" to the market value at time of death
2) sell the home and invest the capital gain amount in an investment in an "opportunity zone". There are numerous requirements. this defers (unitl 2026/7, though may be exteneded) but does not eliminate capital gains tax.
3) sell the home via installment sale. This spreads out the various kinds of taxable income over many years (along with the proceeds) and could be a "win-win". Depending on your neighbors income situation, this could substantially reduce the effective tax rate paid upon sale. if your neighbor wants a ton of cash now, that's not a good option of course.


your neighbor should

Consult a qualified tax professional rather than me, who is just some dude on the internet.

[Anonymous]

Anonymous wrote:No, only way to minimize is to move back in for two years. If he's married he can exempt $500k which is only $100k of tax. If single, $250K so $50k of tax.

That's not completely true. There is a concept called "qualified use" and "unqualified use" and the time(s) the home was rented out is considered unqualified use. You have to prorate your gain between qualified and unqualified. This won't be a completely tax-free sale, even if the gain is less than $250K/$500K.

[Anonymous]

^^^ "nonqualified use" not "unqualified use."

[Anonymous]

Anonymous wrote:

Anonymous wrote:No, only way to minimize is to move back in for two years. If he's married he can exempt $500k which is only $100k of tax. If single, $250K so $50k of tax.

That's not completely true. There is a concept called "qualified use" and "unqualified use" and the time(s) the home was rented out is considered unqualified use. You have to prorate your gain between qualified and unqualified. This won't be a completely tax-free sale, even if the gain is less than $250K/$500K.

+1 it used to be that way like 20 years also, move back for 2 years, not anymore