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The question has to do with gift tax and gifting real estate. I’ll paraphrase the question below.
Q: My mom owns a condo, currently worth around $250k, which has a $0 basis after depreciation She has written it off as a rental on her taxes. She wants to give me the money the condo will sell for so that my husband and I may purchase our first house. Should she gift the condo to us and then we sell it? Should she sell it and gift us the money? Should she live in the condo for the next two years as her primary residence before gifting us the sale? Should she gift it to us and we live in it for the next two years before we try to sell it? Should we do a 1031 tax exchange in which she sells it and we both become partial owners of the next house? The latter is our least favorite as she doesn’t want to have to keep being on the title and transfer every time we decide to upgrade houses.
A: When you’re selling real estate, there are generally two ways to pay less tax now. One is to take advantage of the capital gains home exclusion. The other is to use a like-kind, Section 1031 tax deferral. The problem with the like kind is that you get caught up in a treadmill of always need to buy another problem. You’re not getting away tax free, you’re just deferring the tax. Of course, there is a way out if the taxpayers are older. That’s by using a Charitable Remainder Trust. Of course, that’s really not practical in this case.
If the owner just sells the property, she’ll end up paying about 15% in capital gains tax. She also may have her social security income suddenly taxed, as her income goes up.
If she gifts the property to the daughter, it would just go at the basis. So she’s transferring the same issue to her daughter.
The best answer, if possible, would be to have the mother move into the property and live there for 2 years. If she’s moving out of a house that she will need to sell, she needs to make sure it’s at least 2 years between the sales. This would allow her to get the capital gains home exclusion. That amount is $250,000 for a single taxpayer and $500,000 for a married couple. So, the mom would be right on the line of getting a tax free capital gain exclusion. If the property goes up in value during those 2 years, she’s either going to have to get married or pay some tax. (Paying tax would probably be the best answer. Shotgun tax marriages aren’t recommended.)
Another similar solution would be to have her gift the apartment to her daughter and then have her daughter live in the house for 2 years. She could then sell it and get the capital gains exclusion. Since her daughter is married, the gain exclusion would be $500,000.