Capital gains

[Amyestey]

My mother-in-law (husband is head of household) lives in a home that we own. As she ages,  she now needs to move in with us. We need to make updates to an ADU in our home for her and need to sell the home she is in. Due to market conditions, we assume capital gains. Any way to get any type of relief on the capital gains tax if we are putting all the profits into upgrades for her? I’m not optimistic, and I don’t think a 1031 exchange will work, but wondering if you have any ideas.

[tagteam]

In the scenario you outlined, you have good reason not to be optimistic since your mother-in-law, apparently, does not qualify for the Section 121 (sale of principal residence) exclusion as a result of failing the ownership test.

See https://www.irs.gov/publications/p523#en_US_2020_publink10008939

Further, you will not be able to obtain any relief by reinvesting the profits; it makes no difference, in terms of capital gains tax, what you do with the proceeds.

Finally, a 1031 exchange would only be applicable to investment property which, of course, would not apply to a home owned by you but occupied (free of charge) as the principal residence of a family member. 

[Amyestey]

I am a hopeless optimist! But thank you for bringing me back to reality. I really appreciate the quick response!