Q-1:

Subject: sale of residence Tax Relief Act of 1997

 

I was just reading your page on the sale of residence.

 

If I read it correctly, there is no more deferral of gains on a sale of a residence. The only thing is a $250K exclusion. But what about the taxpayer that sells a residence with more than a $250 gain, and wants to buy another residence. He's screwed. Under the old rules he could defer the gain, but under this new rule he can exclude $250, but the remaining $1 million is taxable. This isn't tax relief.

 

Did I read this correctly?

A-1:

You read that correctly.

As with most things in life, the tax code is based on trade-offs.  The multiple exclusion of gain was considered to be worth more than the previous gain deferral rule.

As for bumping up the amount of excludable gain, which hasn't changed one bit since the law was enacted in 1997, there is little to zero chance of that happening. Our society has an insidious under-tone of envy and hating the evil rich is a full time task for the DemonRats and their propagandists in the media.  This means that expecting any sympathy for having to pay tax on profits above $250,000 is a waste of time.

Obviously, the "fair" thing would be to allow people to choose between the tax free exclusion or the gain deferral by reinvesting into a more expensive home. Unfortunately, as I always have to point out, the concept of "tax fairness" is a huge oxymoron in this country.

If your sale hasn't already closed, you should work with a tax pro to see if there is another way around having to pay tax on your gain.  One common strategy is to convert the home to rental and dispose of it as a 1031 exchange for new rental property or properties and then later on, convert one of the replacement homes to personal use.  The rules for this are tricky; so working with an experienced tax pro is critical.

Good luck.

Kerry Kerstetter

Q-2:

Mr. Kerstetter,

 

Thanks for your response. I was thinking the same thing, regarding a conversion and 1031 exchange. I guess you could refinance before you convert, to pull out some equity, then use that cash to help you buy another residence.

 

The problem I'm thinking of is my old mother's residence that has much more than a $250K gain in it. Maybe I could convince her to sell it now, and exclude $250K of gain. It would seem to be better than the estate selling the property at her death and have the entire gain be taxable. She could rent it back if she wanted to stay there.

A-2:

You and your mother really should be working with estate planning CPA and attorney to work out the best game plan for her. 

Depending on the size of her estate, it is entirely possible that her residence would not be taxable.  Under current law, the heirs receive the property at its stepped up market value as of the date of death.  This means that the heirs can literally turn around and sell the property shortly after and their is no gain.  The only real potential tax to worry about is the estate tax, if the net estate is more than the excluded amount for the year in which she passes away. I have the current schedule of those exemptions on my website. 

If our rulers don't get off their butts and address the estate tax issue in the next few years, there will be a change in the step-up limits for estates created in 2010 and beyond; so no estate plan is perfect for long-term.

A good tax advisor could even help you come up with other options to take advantage of the current tax laws.  One I have seen used is to sell the home now, with a large carry-back of the sales price.  After deducting the $250,000 tax free exclusion, the remaining gain is reported on the installment plan, taxable as payments are received.  That also allows for additional estate and income tax planning opportunities if the note receivable is left to the buyer of the property, such as a child. 

There are several options available, which any experienced tax pro should be able to work with you on.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for the info. I had forgotten about the stepped up basis. I must be losing it in my old age. For 18 yrs I was a Revenue Agent.

 

She set up a family trust, so she's in pretty good shape that way. The only problem is the exclusion amount, which she is probably a little under right now, but might exceed before the next exclusion kicks in, especially if real estate prices continue increasing.

 

Thanks a lot for your help.

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/14/2006 11:13:00 AM Send this post: