Navigating capital gains tax on the sale of an investment property can be complicated. Consult a tax professional to fully understand your options and their consequences.
Q: We bought a rental property (it’s a condo) in 2005 for $80,000. We rented it out until 2016. Our daughter moved into this condo last year after she get married. We are not planning to rent it out anymore. She will live in this condo for at least five years. If we add our daughter to the title, will we have to pay capital gains after selling the condo?
A: You’ve packed quite a number of issues in your question. We’ll briefly address some of the background issues. Your condominium (for federal income tax purposes) is an investment property. If you were to sell the property now, you’d have to pay taxes on the profit you’ve made and may even have to pay taxes on any depreciation you may have taken over the years.
(If you own an investment property you may have benefited on your tax return by depreciating the value of the improvements, thereby reducing your taxes payable to the IRS.)
On the other side of the coin, you have the primary residence rule that allows married homeowners to exempt from any federal income taxes the first $500,000 in profit on the sale of a home ($250,000 for singles) provided the homeowners have lived in the home for two out of the last five years as their primary residence.
What you seem to be trying to do is to convert an investment property into a residential property, hold it for five years and then not pay any taxes on the sale. Several years ago, the IRS took up this issue and decided that it will require homeowners in your situation to treat the home as two separate properties. That is to say, one property would be the condo for the time you owned it as an investment property and the second property, the one you owned as a residence.
However, in your situation, by adding your daughter to title, you complicate things even further, and get farther away from your goal of not paying taxes on any profit you realize.
You don’t plan to move into the property or use it as your primary residence. So, it is unlikely that the property will convert or even qualify for the $500,000 exclusion ($250,000 if you’re single). On the sale down the line, the property will likely be treated as an investment property for the years you owned it and as a second home for the time your daughter lived in it and you ceased claiming it as an investment property.
Another wrinkle in all this will be that your transfer of an interest in the home to your daughter will be considered a “sale” for IRS purposes. You and your wife are the sole owners of the investment property. After you put your daughter on title, you might be deemed to have sold a one-third interest in the property to her. So, you might inadvertently create a taxable event just by adding her to title.
As you can see, this is complicated stuff. Please consult with a top accountant, Enrolled Agent or tax advisor to understand fully the consequences of your options before you put your plan into place. Good luck.
What happens when you buy a condo vacation and several years later the development is to be torn down. The initial cost was $300k and now it if developed will be a 3 million if you allow redevelopment. How is the gain treated. Developers are telling owners they won’t pay capital gains as it is in the same location it’s just “remodeled” when in reality it is a total tear down and rebuild. Each owner gains a unit worth 10 times the amount they paid. What is the it’s law on this do the owners get off not paying capital gains in this case