AboutCarole Dunton Expertise Preparation of individual income tax returns including social security, pensions, lump sum distributions, sale of personal residence, stock and mutual fund sales, distributions from individual retirement accounts, moving expenses and itemized deductions.
General knowledge of schedule C for small sole proprietorships.
No experience in corporate, estate, partnership or large business returns.
Experience 8 years as tax preparer for major national firm.
Expert: Carole Dunton Date: 7/18/2008 Subject: Capital Gains on Real Estate
Question My wife currently own our home in San Jose, Ca, approximate value $400,000. We also own 3 acres of undeveloped agricultural land in Hawaii, currently assessed at $540,000. Our basis in those 3 acres is zero, as she inherited the land from her father. We would like to sell that land, but we are concerned about getting a large capital gains tax bill.
I am wondering if I could avoid the tax bill by building a home on that land and living on it for the requisite two years. To do so we'd either have to sell our home or borrow against it to cover the building costs. I understand that together we have a $500,000 home sale exclusion on our primary residence. I also understand that we can take that exclusion every two years on another home. Further, I have read that you can convert a rental property into your primary residence and take the $500,000 home sale exclusion, providing that you live in the new residence at least two out of the five years before the sale.
So, if we built a home in Hawaii and rented it out, then sold our home in San Jose and moved to Hawaii and lived there at least two years, am I correct in thinking that if we then sold the Hawaii home we would be entitled to the $500,000 home sale exclusion again?
Answer Hi,
All of that would work but you could not exclude all the gain on the rental unit even if it is $500,000 or less. One of your rental expenses is depreciation. When you sell the rental home you have to recapture the depreciation allowed or allowable (meaning that even if you don't claim the deduction, the sale is treated as though you had).
The basis in the inherited land is the fair market value on the date of death of the person from whom she inherited it. If you sold the property at a gain within a reasonable time after that date your gain would be small.
