Hello and thank you for using Just Answer. You wrote that your accountant treats it as a rental property. Did your accountant deduct expenses and deprecation on you tax return for the second house?
I am trying to read through the past messages to see what has transpired here so I can give you an answer to your question. From what I have read, I am assuming that you are selling your "second" home which your in-laws currently rent from you, and this porperty was treated as rental property by your accountant, and he took depreciation on the property. If that is the case, then you could not classify that as your primary residence and would have to pay tax on the gain on sale of that residence at the capital gains tax rate of 15%. It does not matter that your elderly parents occupied the home, it is still considered rental property.
A 1031 exchange of that property for another property of like kind would enable you to exclude the gain, but that is the only way you would avoid the capital gains tax on that home.
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Hello again grasshopper64,
The foundation of the 1031 exchange rule by the IRS is that the properties involved in the transaction must be "Like Kind" and Both properties must be held for a productive purpose in business or trade, as an investment. So your second home, which is now classified as a rental home, would qualify for the 1031 exchange on another rental home.
The 1031 exchange rule also lays down a guideline for the proceeds of the sale. The entire cash or monetary proceeds from the original sale has to be reinvested towards acquiring the new real estate property. Any cash proceeds retained from the sale are taxable.
The second fundamental rule is that the 1031 exchange requires that the replacement property must be subject to an equal or greater level of debt than the property sold or as a result the buyer will be forced to pay the tax on the amount of decrease. If not he/she will have to put in additional cash to offset the low debt amount on the newly acquired property
If this answer has been helpful, kindly press the "Accept" key. Positive feedback is also greatly appreciated. Thanks again.