Avoiding Capital Gains On The Sale Of A Hose
I have a single friend, mid-50s who has a rental home as well as her primary home. If she sells the rental she could pay off her primary residence (just barely). How can she do this and avoid a huge tax gain??? Can she use a 1031?
Your friend should really should consult with a good accountant, but I will try to at least give some direction for you to guide your friend with.
There are a couple of posts on TCI that may be of help also:
http://www.thecreativeinvestor.com/ViewTopic3469-23-3.html
http://www.thecreativeinvestor.com/ViewTopic1414-23.html
I will tell you that investment real-estate gains are tricky since they can be taxed in two different ways. If you claim depreciation deductions, at least some of those gains (so-called unrecaptured Section 1250 gains) are taxed at a maximum rate of 25%.
If your friend sells their home and has owned and used as their main residence for at least two years out of the five-year period ending on the sale date. They are allowed to exclude (pay zero federal tax on) up to $250,000 of gain. If they are married, they can exclude up to $500,000.
Even if your friend doesn't meet the two-out-of-five-years rule, they may still qualify for a reduced gain exclusion privilege because if their gain from a sale after May 5, 2003 exceeds the amount they can exclude, the difference is treated as a long-term capital gain eligible for the 15% maximum rate (or 5% or 10% if their taxable income is low enough).
A 1031 can defer capital gains but Section 1031 of the Internal Revenue Code provides that tax on gain from the sale of real or personal property held for investment or business purposes can be deferred if the property is exchanged (rather than sold) for other like-kind property.
It sounds like your friend wants to sell rather than exchange.
I hope this helps.
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John is correct. The only way to do this is to sell. The primary residence is not rental or investment property and therefore not like kind for 1031 exchange treatment.
How long has she lived in her primary residence. If it is more than 24 months she might want to consider selling that and taking advantage of the 121 exclusion and then moving into her rental.
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