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bdm0186
Returning Member

Capital Gains options when selling a rental property?

Hello,

 

I just accepted an offer on a rental property I've owned along with my aunt (both of us are on the deed) for 10 years. The property will be selling for 110K and we purchased it for 32K. I've started to do some research on Capital Gains that I'll owe and wondering if anyone could suggest any help with what options I might have. Couple questions.. 

 

1.) If the check is written to my aunt on the sale of the property, can she claim the entire amount on her taxes and be taxed in the 0% bracket as she's retired and her taxable income is under 38,000 for 2021 tax year?

 

2.) If so, is she then able to gift me the amount tax free (but would have to fill out a gift form as the amount is over 15K)?

 

3.) My plan is to invest most of the money into dividend stocks and just let it sit. Is an IRA also an option to avoid Capital Gains tax?

 

4.) Also the Rental Property (Duplex that is two separate addresses) was my primary address for 2 out of the last 5 years. I lived in one side in 2017 and 2018 and rented the other side of it until I built a home which is now my pimary address in 2019 and on. Does this have any impact on capital gains?

 

Any other advice would be much appreciated!

6 Replies
Critter-3
Level 15

Capital Gains options when selling a rental property?

Your questions cannot be answered simply since so much depends on how you have been handling the rental I'll n your tax returns all these years. You never mentioned taking depreciation all those years...so if you have not you need to RUN to a local tax pro to get that fixed correctly. 

 

I highly recommend you sit down with a local tax pro and a RE attorney before this sells to find the legal way to report the sale so the IRS is happy. 

bdm0186
Returning Member

Capital Gains options when selling a rental property?

I've taken depreciation over the years on the property.

Critter-3
Level 15

Capital Gains options when selling a rental property?

Again seek local professional help ...this is not the time for either of you to DIY without knowing all the options legally allowed. 

 

Local & state laws may also apply. This nameless faceless forum is not the best place to get answers on a complicated situation.

Carl
Level 15

Capital Gains options when selling a rental property?

The answers are not simple by any stretch, as you've left out quite a lot of information. Because of this, even with the information included you'll still need to deal with a tax pro on this. Without knowing how the taxes were dealt with since you two purchased the property, its just not possible to provide anything close to a definitive response.

1.) If the check is written to my aunt on the sale of the property, can she claim the entire amount on her taxes and be taxed in the 0% bracket as she's retired and her taxable income is under 38,000 for 2021 tax year?

Who the check is written to doesn't matter. When you sell your share of the property, what you do with the proceeds doesn't matter. Either your percentage of the gain is taxable, or it is not.

2.) If so, is she then able to gift me the amount tax free (but would have to fill out a gift form as the amount is over 15K)?

You can't be gifted that which you already own. (Or what you owned prior to the sale)

3.) My plan is to invest most of the money into dividend stocks and just let it sit. Is an IRA also an option to avoid Capital Gains tax?

What you do with the proceeds doesn't matter. That law deferring taxes on the gain was dropped/phased out/eliminated back in 1997. If your gain is taxable, you pay taxes on it. Period.

4.)Also the Rental Property (Duplex that is two separate addresses) was my primary address for 2 out of the last 5 years. 

Looks like you're going around your elbow to get to your thumb. Or at least, that's my initial impression here. Assuming the tax reporting history of the property allows it, you will report the sale of your half, and your Aunt will report the sale of half. Period. End of Story.

If you qualify for the "lived in 2 of last 5" capital gains exclusion for your half counting back from the closing date of the sale, then you won't pay taxes on *YOUR* gain. But do understand that you will pay taxes on the recaptured depreciation no matter what. Depreciation recapture is not exempt from taxation.

More than likely the complexity of this will require a tax pro depending on how this property was reported on taxes by both you and your Aunt in past tax years. Depending on how things were reported in the past, the TurboTax program may not be able to handle a situation where you have a duplex with two owners and one of the owners used a unit for their primary residence.

Please seek professional assistance. The fines, penalties and back taxes from doing this your self and getting it wrong will make the cost of a tax professional seem like a pittance in comparison.

tagteam
Level 15

Capital Gains options when selling a rental property?

I agree with the other two answers; you need to consult with a local tax professional.

 

If your situation is as follows, TurboTax will not be able to handle the transaction (at least not without major overrides on forms and worksheets).

 

You bought a building (a duplex) with your aunt and initially rented out both units. You moved in to one of the units after renting that unit for several years and used it as your primary residence. You then moved out of that unit and rented it until the time at which it was sold (or will be sold).

rjs
Level 15
Level 15

Capital Gains options when selling a rental property?

@bdm0186 

 


@bdm0186 wrote:

If the check is written to my aunt on the sale of the property . . .


I'm not sure you can do that. If you are a part owner, your share of the proceeds probably has to be paid to you. Your lawyer can tell you for sure.

 


@bdm0186 wrote:

can she claim the entire amount on her taxes and be taxed in the 0% bracket as she's retired and her taxable income is under 38,000 for 2021 tax year?

The tax on long-term capital gain doesn't work that way. The gain from the sale is included in her taxable income. Her other income, plus the gain, will use up the 0% bracket, and the rest of the gain will go into the 15% bracket.

 


@bdm0186 wrote:

Is an IRA also an option to avoid Capital Gains tax?


An IRA contribution has to be based on "compensation." Capital gain is not compensation.

 


Take the advice of the other people who replied and consult a local attorney and a local tax professional.

 

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