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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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If a neighbor and I swap vacation homes and he pays me ...

Resolved Question:

If a neighbor and I swap vacation homes and he pays me $100k extra for my home, what is the tax implication to me?
Submitted: 8 years ago.
Category: Tax
Expert:  Ed Johnson replied 8 years ago.

Dear Harrington,

the 100K is considered capital gains.

But I need to know more about this:

1. You mention that you had no rental income for the past two years. Was this a rental property, and have you reported rents and expenses on schedule E? And even though you had no rents, did you continue to file schedule E for the past two years?

2. did you live in the property as a PRIMARY residence for at least 2 years of the past 5 years? The time spent in the second home to meet this test did not have to be consecutive. You can total months lived in over the past 5 years to come up with 2 years of qualification.

Customer: replied 8 years ago.
Reply to Ed Johnson's Post: We rented the home for a week last year and we did the same again this year (2008). We did file schedule E last year and will do so again next April.

The property is not and never has been our primary home.

So, can we simply exchange titles on the two properties and then I pay the long term cap gains (we have owned our vacation home for over 7 years). Thx!
Expert:  Ed Johnson replied 8 years ago.

Yes, you will have to pay capital gains of 15% on the 100K.

But acutally your capital gains may be less.

The formula for capital gains in your situation would be:

Capital gains = sale price (FMV of home + 100,000) - (original cost of home + improvemens and additions, + major repairs, + closing costs not deducted else where from when you purchased it, - accumulated depreciation from your rental periods) - cost of selling or trading the property.

NOTE: there will be a small recapture tax of 25% on the accumulated depreciation for the rental periods of the property.

ALSO NOTE: major repairs are those thanks you fixed or replaced that are intended to last one year or more. Such as replacing shingles on the roof, or bathroom tiles, etc.

 

 

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