Here’s a question that we received at USTaxAid.com recently. Fair warning. If you ask a tax question, you’re going to get a general answer. That’s because I can’t give an individual consultation with limited information. You would need to hire me for a consultation. If it’s complicated, like this one is, you don’t want to try this on your own. You must have an experienced CPA and Exchange Accommodator working with you, right from the start.
Here’s the question:
I’m hoping you may be able to help me with my tax question. The gist of it is:
– My mom and I purchased a house together as 50/50 joint owners in 2012.
– We are looking to sell the house in the next couple of months. It will likely sell for around $800k more than we paid for it.
– We’ve both lived in it for the majority of the time, while renting out approx. 75% of the house to various tenants (I report this income on my tax returns, not both of us).
– For various reasons (e.g. refinance), we shifted ownership of the home several times over the years (first to me, then back to joint, now back to me).
The questions are:
– What (if any) are the tax implications of having shifted the home ownership?
A: That does create a complication. If the home was a personal residence for one of you, and not the other, you’ll need to see how you each qualify under the capital gains exclusion. Remember that’s it not as simple as the 2 out 5 year rule for any rental use after 2009. It gets a little trickier. That’s covered in Taxmageddon 2018, which is now available at www.Taxmageddon2018.com.
Q: Now that we’re ready to sell the house, should I sell the home myself (and claim the $250k exemption and 1031 exchange the rest), or should I shift it back to joint ownership so we can both claim the exemption (and doing a 1031 exchange on the remainder, if any)?
A: It used to be that you couldn’t do both a Section 121 (capital gains exclusion for personal residence) exclusion and a 1031 exchange on the same property. The IRS gave us guidelines in Revenue Procedure 2005-141.
My approach would be to first see how to work the Section 121. Since it was part personal use for two different people and part rented, you need to see what the calculation will be for possible capital gains exclusion. You both may be able to claim some, but without knowing all the dates that’s impossible to tell now.
Then, take a look at how much was rented and how much was primary residence. Was it always the same amount of the house? When the house was owned by your mother and then you rented it out, did you pay your mother a fee for using her property? And finally, what is the total square footage used for each (primary and residential)? Is it divided space or in the same space?
You need both a CPA who understand this law and an Exchange Accommodator who is familiar with complicated Section 1031 like kind exchanges. I’d also recommend you pick up Taxmageddon 2018 and read up on the changes to real estate like kind exchanges and personal residences. It has gotten more complicated.