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Jonathan Tierney
Jonathan Tierney, Certified Public Accountant
Category: Capital Gains and Losses
Satisfied Customers: 307
Experience:  Tax Accountant at Praxair, Inc.
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I have a second home, not a rental beach home, wish to sell

Customer Question

I have a second home, not a rental beach home, wish to sell - inherited and put in a lot of improvements plus taxes for 23 years. How do I figure capital gain tax? Inherited for $150,000.00 put in $174,000.00 improvements plus $73,000.00 in taxes for 23 years. Will sell totally furnished for $550,000.00. Can I purchase a similar home in lieu of paying capital gain taxes ?
Submitted: 10 months ago.
Category: Capital Gains and Losses
Expert:  Jonathan Tierney replied 10 months ago.

Hi, my name is ***** ***** I can help.

You cannot purchase a similar home in lieu of having capital gains as the IRC 1031 exchange, which I believe you may be thinking of, is only available for property that has been used in a trade or business, such as a rental real estate. Since you have not rented the property out, this would exclude you from doing a 1031 exchange.

You capital gain is the gross proceeds from the sale less your adjusted basis and selling expenses. Your beginning basis in the fair market value at the date of death of the person you inherited the property from, which I assume is $150K like you wrote. Your basis is increased for any improvements (though not repairs) that were made to the property since you have had it. Real estate taxes do not adjust your basis though you could have deducted them on Schedule A of your Form 1040 each year as an itemized deduction. So you net capital gain would be $550K minus $150K (starting basis) minus $174K (improvements) equals $226K in long-term capital gain. Any legal fees and/or broker commission would also reduce your capital gain.

I hope this answers your question. Please let me know if I can clarify anything or answer any additional questions.

Thanks, Jonathan

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