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Author: edgynewparts Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121335  
Subject: $500,000 Home Sale Exclusion Date: 5/2/2004 6:18 PM
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I am approaching the point where my house is worth about $500,000 more than my wife and I paid for it. I have a trusted friend who is in the same position.

IRS Publication 523 states that "You cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you cannot exclude the gain, you must include it in your income."

Thus, it appears to me that the $500,000 exclusion for capital gains can be used more than once as long as there is 2 years between the times that the exclusion is used. If that is true, what prevents my friend and me from selling our houses to each other in legitimately documented sales with title transfers, then renting our respective houses to each other (we each become the other's landlord). We then can each take the $500,000 exclusion on the gain. After 6 months or a year, we each sell our houses back to the other for what we paid. We then have a new basis and, if we stay in the houses for another two years after that, we can utilize the exclusion again if either of us finds it necessary to sell. Ignoring transaction costs, it seems to me to be a way to shelter the gain once you reach the limit of the exemption but do not intend to actually move out of your house. Even if one or the other were forced to sell within two years after that, he is no worse off, again ignoring transaction costs, than if the transaction had not taken place.

Is there something I am missing? It seems that if the sales are structured legitimately between non-related parties, it complies with the letter of the law, which I understand is what is required by the tax code.
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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71700 of 121335
Subject: Re: $500,000 Home Sale Exclusion Date: 5/2/2004 7:49 PM
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Thus, it appears to me that the $500,000 exclusion for capital gains can be used more than once as long as there is 2 years between the times that the exclusion is used. If that is true, what prevents my friend and me from selling our houses to each other in legitimately documented sales with title transfers, then renting our respective houses to each other (we each become the other's landlord). We then can each take the $500,000 exclusion on the gain. After 6 months or a year, we each sell our houses back to the other for what we paid. We then have a new basis and, if we stay in the houses for another two years after that, we can utilize the exclusion again if either of us finds it necessary to sell. Ignoring transaction costs, it seems to me to be a way to shelter the gain once you reach the limit of the exemption but do not intend to actually move out of your house.

Leaving aside issues of rental income/expenses and depreciation recapture, these transactions, IMO, have a little trouble passing the "smell test." What it says to me is that there really was never an intention to divest ownership, thus no legitimate sale, thus no recognized gain to exclude.

I'd suggest you discuss something like this with a tax lawyer (who enjoys privilege) before even thinking seriously about it.

Phil

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Author: numbrel Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71701 of 121335
Subject: Re: $500,000 Home Sale Exclusion Date: 5/2/2004 9:43 PM
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I don't know about the legal side of things, but you are taking a risk and hoping that everything works out. I can think of several things going wrong.

One of you gets into financial difficulties and can't get a mortgage to buy their house back. Are you absolutely sure of your finances and your friend's? Sometimes all it takes is one little car accident or illness that impares someone's wage earnings for a month or two to put you or friends where you can't pull off the buy back.

One of you needs to sell and the other isn't ready to buy back their house.

There is a disaster, fire, earthquake, drunken army tank driver drives his tank into your house, whatever. Who makes the decisions about how 'your' house will be rebuilt? What if the insurance doesn't cover everything you want?

The crash finally shows up and you're both underwater in your mortgages and at least one of you can't afford to payoff the difference. Both houses are then worth a lot less than the $500,000 you tried to save.

And on and on.

Barbara

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71702 of 121335
Subject: Re: $500,000 Home Sale Exclusion Date: 5/2/2004 9:44 PM
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Is there something I am missing?

Aside from the "smell test" that Phil mentioned, I see one other major problem. (And I'll chime in that this smells pretty bad.)

You basically have to trust the other party to sell back to you down the road. If you put such an agreement in writing where is it really enforcable (like recording it with your county recorder), you'll probably also be documenting that the transaction is a sham designed to avoid taxation. That would not be a good thing.

Without such an agreement, many things could happen. Worst case, they could die and the heirs, not willing to honor some handshake agreement that they are not party to, sell your house out from under you. They could suffer a financial reversal and be unable to purchase their residence back from you. They could be involved in some accident that caused them to suffer a large liability beyond that covered by insurance, again putting your home at risk of sale.

--Peter <== remembering the old saying "pigs get fed, hogs get slaughtered"

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71707 of 121335
Subject: Re: $500,000 Home Sale Exclusion Date: 5/3/2004 9:59 AM
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Other taxes:
In California, it would reset your tax base. Increasing real estate taxes starting at $5,000 a year.

State income tax? Federal allows the exemption, but does your state?

Others have previous listed other issues with mixing your finances with neighbors or family.

Debra

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Author: gurdison Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71713 of 121335
Subject: Re: $500,000 Home Sale Exclusion Date: 5/3/2004 4:27 PM
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<army tank driver drives his tank into your house>


Or if you live in Long Island there is always the danger of Billy Joel driving into your house.


http://abclocal.go.com/wls/news/print_042604_ap_en_billyjoel.html



B

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Author: vandolsen One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71753 of 121335
Subject: Re: $500,000 Home Sale Exclusion Date: 5/6/2004 1:45 PM
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Other taxes:
In California, it would reset your tax base. Increasing real estate taxes starting at $5,000 a year.

State income tax? Federal allows the exemption, but does your state?


Had a related conversation with my tax guy a few weeks back. California follows the Fed on this one.

Nice theoretical argument, but I would not go there for all of the reasons cited in the thread.


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Author: Anon103 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71759 of 121335
Subject: Re: $500,000 Home Sale Exclusion Date: 5/6/2004 4:45 PM
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My understanding is that the house on which you get the exclusion must be your prinmary residence. If you are renting it to someone else, it is no longer your primary residence, so you will not qualify for the exclusion. Instead of trying to beat the system, why not just sell your house, buy a new one, live in it for two years, and repeat that legitimate process....

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Author: SirTas Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71762 of 121335
Subject: Re: $500,000 Home Sale Exclusion Date: 5/6/2004 11:56 PM
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My understanding is that the house on which you get the exclusion must be your prinmary residence. If you are renting it to someone else, it is no longer your primary residence, so you will not qualify for the exclusion.

Not exactly. The house on which you get the exclusion must be your primary residence for two years during the previous five years. (It doesn't have to be your primary residence at the time you sell it--you could have been renting it out at that point.)

From the FAQ for this board:

Restrictions
Like virtually all other tax laws, there are some restrictions. This exclusion has a detailed set of rules that must be followed to qualify for the exclusion. Besides the $250,000/$500,000 dollar limitation noted above, the seller must have owned and used the home as his or her principal residence for at least two years out of the five years before the sale. And, while the two years don't have to be consecutive, in most cases you can only take advantage of this gain exclusion provision once during a two-year period.


--SirTas


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