Q:

Subject: Please help me undertand:

 

OK - My Personal Residence is worth 2.5 Mil.

My Wife & I moved in 10 yrs. ago but it was purchased out of proceeds from a couple 1031 roll-overs started in 1985 and that original purchase was $85,000.00

I want to sell and buy a lesser personal residence priced at 2.0 Mil. Can I take the $500,000.00 and put in my pocket with no further tax consequence or do I get hammered for $ Two Million worth of profit.

Thank you,

A:

 There hasn't been a residence replacement requirement since 1997, so what you do with the sales proceeds will have no effect on your tax bite.  You can see the current rules here.

If you sell the home as your primary residence, your gain will be approximately $2,415,000 assuming your cost basis is that $85,000 figure.  It will obviously be lowered by any capital improvements you have put into it and any selling costs.  It will be increased by depreciation while it or its predecessors were used for business or rental. 

You and your wife are eligible for $500,000 of tax free gain.  This means the remaining $1,915,000 will be taxable.  Except for the depreciation recapture portion, it will be taxed as long term capital gain. 

For that kind of money, you should be consulting with a tax pro.  There are a number of ways to reduce the tax hit, including recognizing any capital losses that you may have in your portfolio.  A more aggressive tax saving technique would be to convert the home to rental and then do a 1031 exchange with it

Good luck.

Kerry Kerstetter

 

Follow-Up Q:

Thank you for your reply, after my E to you I found another article, and with all due respect I have enclosed a link that states the opposite.

As I read it, the example is exactly my scenario.

Two thirds down the article please see "IS THE REVERSE TRUE"

It states I believe that when the property status is changed from a 1031 Income to a Personal Res. that the gain is deferred and the cost basis begins then. (We moved in 1994)

AM I WRONG??

http://www.1stgrand.com/Understanding_Capital_Gains_Tax.htm

A:

Actually, you are seriously misinterpreting the rules here.

Converting a home from rental to personal, or vice versa, is not a taxable event and thus does not change its cost basis.  It remains the same.

That section called "Is The Reverse True" really deals with the pre May 1997 rules for residence replacement and is no longer relevant. 

You really need to be working one on one with a tax pro on this.

Good luck.

Kerry Kerstetter

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2005 04:32:00 PM Send this post: