Message Font: Serif | Sans-Serif
UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev | Next
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 122300  
Subject: Re: Capital Gains tax Date: 8/13/2004 12:22 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 7

PharmBoi: "I was discussing this today with my brother and he suggested the following:

let the current lease run through 6/30/05 and do not renew it. Let it sit vacant for 2 years and then sell it. If house prices remain static for those 2 years, I could walk away with $250k, tax free. The $19k in mortgage payments would be a lot less than the capital gains tax on $250k.

Does this seem reasonable? Legal?"

No, it seems idiotic (sorry to be so blunt). The opportunity cost would huge!

And it will not be legal, either, if the house sits vacant for two years.

As another posted noted, you need to have lived in and occupied the property as your principal residence for 2 of the 5 years preceding the date of sale.

In a prior post, you wrote:

RE---Capital Gains vs. Section 1031

"My question is regarding the '2 of the last 5 years' rule for capital gains purposes, but before I ask the question, let me provide some background information:

I let a property on 7/1/01 for a 1-year period and the tenant abandoned the property on 2/11/02 (documented by the district court). The property was re-let, for 2 years, in May 2002 with the lease expiring on 5/31/04.

Based on recent resales in the development, if I sell now, my profit will be in the $150k range."

Post 69063 Buying Home

Ira's response to your question on the Tax Board


"cross-posted from the buying/selling house board...

Related somewhat to my prior questions;

As I couldn't met the June 30 deadline to avail of the capital gains allowance under the 2-year rule, I renewed the lease for another year and am resigned to the fact that I will have to pay capital gains sometime down the road, whether or not I avail of Section 1031.

When I sell, what valuation do I put on the property, if?

I bought it for $150k but when I converted from residential to commercial, the property was deemed to the worth $300k and was taxed and insured at that level.

Similar houses are currently selling in the low $400k's, in an agressive buyers market. Would it be fair to say that the taxable profit on my investment is $100k ($400k - $30k), if I were to sell today?

Could the other $150k of the profit be exempt from capital gains as it is below the $250k threshold as the property was my primary residence for the preceeding 4 (continuous) years?

I'm googling, but offhand does anyone know if there is a precedent?"

IRA: "I'm reading between the lines here (since I don't know what "2 year rule" you are referring to), but I think your situation is the following:

You bought a residential property for $150K. Later you converted the property to rental property. You have owned the property for more than 2 of the last 5 years, but can no longer claim to have lived in the property for more than 2 of the last 5 years, so you don't qualify for the 250K/500K capital gains exclusion. You then want to know how your gain would be calculated and taxed if you were to sell today. If any of these assumptions are wrong, then what I am about to write may be incorrect.

When you converted the property from personal residential use to rental, you needed to determine the cost basis of the property as a rental property. This is the lesser of your adjusted cost basis (150K plus capital improvements) or fair market value (300K). I would assume that your cost basis is the lesser amount.

You then have to begin depreciating the building portion of the property (but not the land component). If you were to sell today for $400K, the following would apply:

You would show a long-term capital gain of $250K ($400K-150K). (I've ignored issues such as selling costs which could reduce the taxable gain.) You would also show a Section 1250 gain equal to the amount of depreciation you've taken or should have taken. This gain would be taxable at a rate equal to your ordinary tax rate, but not to exceed 25%.

Tax can be deferred through the use of a Section 1031 exchange if done correctly. Once you fail the 2 out of 5 year ownership and usage tests, you cannot prorate the capital gains exclusion unless you meet one of the exceptions (job transfer, medical, etc.)

If I've assumed something in error, or something isn't clear, just ask again."


From your posts, it appears that you have not lived in the property as your primary residence sine sometime before 7/1/01. Is that correct?

I assume because it was:

--- leased 7/1/01, abandoned 2/11/02 (documented by the district court).

--- re-let, for 2 years, in May 2002 with the lease expiring on 5/31/04.

---renewed the lease for another year (until 5/31/05)

and now you propose to let "current lease run through 6/30/05 and do not renew it. Let it sit vacant for 2 years" (until 6/30/07)

If you sell the property sometime after 5/31/07, when will you have occupied the property for 2 years in the five years preceding the sale???

If you are that afraid of the capital gain tax, I can save you all of the capital gain tax PLUS the 19k in mortgage (and what about tax, insurance and maintenance) ---- just sell me the property at your basis to close on 6/30/05. You will owe no taxes and you will not need to pay the 19k in mortgage payments, either.

As another posted noted, at 15% LTCG rate, the taxes on 250k of gain are $37,500. Foregoing 2 years income on the property and paying 19k in mortgage payments, plus tax, insurance and maintenance and other issues related to vacancy is, IMNSHO, off the wall.

Regards, JAFO

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev | Next


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
Foolanthropy 2014!
By working with young, first-time moms, Nurse-Family Partnership is able to truly change lives – for generations to come.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.