I’m a Income tax analyst and these are my thoughts.
Rick I think you were referring to the homestead exemption rule that allows “homeowners” who live in real property for 2 out of 5 years, the ability to keep any gains on the sale of their PRIMARY residence. The amount is up to $250,000 for singles and up to $500,000 for a married couple. In a nutshell, regardless of how you structured the deal with your business partner, his name is on the deed. He was entitled to the tax depreciation on his return as well as the exemption of capiral gains tax. The thing is, the IRS would look at your situation as a renter-landlord type. Isn’t that was usually happens when you rent to someone? They pay your mortgage etc.
One thing to consider though is that your business partner can not claim the capital gains tax exemption because although the partner’s name is on the deed, the dwelling wasn’t his primary residence. He’ll have to pay capital gains if there is any.
I’m pretty sure I’m right here, but if someone else can dispute, I’m willing to listen.
My wife and I are in the business of buying houses and fixing them up or adding square footage. The house we are currently living in started out as a deal with a friend and we are buying him out.
The problem we are going to have is that the house was purchased in his name. We have been making the payments on the loan and have been paying for the improvements for the past 2 years while we lived in it.
We were hoping to be able to sell in the spring, but are now confused over the tax exemption rule. If anyone has any advise how to get around this we would love to hear it.
Re: Creative tax solution for personal home sale - Posted by Nate(DC)
Posted by Nate(DC) on October 06, 2003 at 01:23:45:
Since you aren’t currently the owner of the house, it doesn’t look like you have a tax problem. If he is currently the sole legal owner, and you are “buying him out”, in essence he is selling the house to you, so it is he who has the tax issue, not you!
If you have not purchased the house from your friend yet. Is he claiming it as residence or rental? If he is claiming as residence then he has the 2 year limit. Sell under his name and share some profit with him. If he claims it as rental then he to must pay Gains tax. OR 1031 exchange for like property. If you buy it from him now you are in it for 2 more years or pay the tax. He could sell to you real high (if he is residence) and you could sell at cost show a loss save taxes, if he will split profit with you. There are a few ways you could finance to cash out your equity and move on to your next project and rent out the house. Be careful there are some ways to move, but you dont want to get the IRS on you for anything.
jeff