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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7434
Experience:  15years with H & R Block. Divisional leader, Instructor
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Hi, I found my dad in his house August 27, 2009. I inherited

Resolved Question:

Hi,

I found my dad in his house August 27, 2009. I inherited a single family residence unencumbered that went into probate. As the executor, I had a large amount of debt that I paid off by repairing the property and renting it out.

Probate closed November 2011; I continued to rent the property out.

The cost basis for the property in the probate appraisal was $275,000.

Now, I'm considering fixing the property up to sell in order to buy several fourplexes.

I am concerned about capital gains. The property is close to where I work, so in theory I could live in it.

However, the memories of finding him are making it difficult to be there.

I know the rule is 2 out of 5 years, but doesn't my dad living in the house count for part of that time or is it just the time I live in the house? Is there any change in the 2 out of 5 year rule for properties from inheritance?

I am reluctant to do a 1031 exchange because I'm not sure I could identify several duplexes in 45 days to purchase.
Submitted: 1 year ago.
Category: Tax
Expert:  Robin D. replied 1 year ago.

Robin D :

Hello and thank you for using Just Answer,
The rule for exclusion is on your personal use of the property (you are correct on that). Your basis is the fair market value when you inherited the property and as you have been renting the property for profit you will need to recapture depreciation if you do sale for more than your basis. Recapture means you will pay regular tax on the amount of the depreciation you have claimed.
The 1031 would be your safe harbor on capital gains tax if you can stay within the timeframes needed.

Robin D :

I understand about your feelings on using the property and please accept my condolences.

Customer:

HI Robin,

Customer:

Okay, so I plan on leaving the Bay Area within the next year or so.

Robin D :

Hi

Customer:

the thing is, if I move into the property, I will need to move before 2 years

Customer:

probably at most a year

Robin D :

And you would still need to recapture depreciation (if you have a gain).

Customer:

it was depreciated while in probate by the estate

Customer:

and personally for the year that I held it

Robin D :

That amount will not be so much and it is your depreciation that matters (while you owned it)

Customer:

I think it was about $8K

Customer:

so do I have to pay $8K back if I sell it

Customer:

if I don't stay in the property for 2 years

Robin D :

No but the $8k would be added to your income as ordinary

Customer:

ah okay

Customer:

that's fine

Customer:

how would I know the capital gains rate?

Customer:

apparently it is worth about $450K now

Customer:

well I can't really tell, between $350K and $450K

Robin D :

The rate is dependent on your income total (20% most likely)

Customer:

not 15%?

Robin D :

Not if you are going to have that high of a gain and guesstimating on income

Customer:

ok

Customer:

so if I live in it a year

Customer:

does that help?

Customer:

or is it 2 years or nothing

Robin D :

If you lived in it a year and had to move for job or medical or some other unforseen reason you could take a partial exclusion

Customer:

such as finding a job in another area?

Customer:

or would i have to lose my job

Customer:

trying to google around for exclusiosn

Robin D :

Finding a job would be OK

Robin D :

You do not have to loose the one you have, you could just be transferred

Customer:

in my case I am looking to be with my fiance in Los Angeles

Customer:

so I'm looking for jobs out of the area

Robin D :

That would be reason then

Robin D :

for a partial

Customer:

okay

Customer:

sorry for teh follow up questions, will add bonus

Robin D :

No problem

Robin D :

Better we cover everything then you have to wonder

Customer:

so can I maintain two residences, an apartment by my office and the house?

Customer:

I've thought about renting out the rooms and having all my mail go there

Robin D :

You can have 2 but only one can be your main home

Robin D :

That is the one you spend most of your nights in

Customer:

but maintaining my apartment near the office

Robin D :

Where your mail goes to and where you vote

Robin D :

The apartment can be 2nd home

Customer:

yes, all of my mail would go there

Customer:

utilities are in my name

Customer:

drivers license is in my name

Robin D :

Those are good things

Customer:

that address

Customer:

sorry

Customer:

but I don't need a 4 bedroom house

Customer:

so I was thinking of renting the rooms, keeping a room for myself

Customer:

but keeping my apartment by my office

Robin D :

You can rent partial

Robin D :

You can also still use the exclusion on renting a portion of the home

Customer:

dont' understand

Customer:

so you're saying I can still rent par tof the house

Customer:

but still claim it as a primary residence

Robin D :

There is a diffderence in renting out the total house or just a portion

Robin D :

Yes

Robin D :

to what you just stated

Customer:

there are two stories, with separate keys

Customer:

my family's belongings are all in teh second story

Customer:

have been since he died

Customer:

only the downstairs has been rented out

Robin D :

So the half upstairs would become your residence

Robin D :

If the downstairs is a totally separate residence then you would need to split everything (like a duplex) your exclusion would be just to the half you lived in

Customer:

it doesn't have its own bathroom or utilities

Robin D :

Ok then it is all your residence (should you make it so) and you would claim the rent on the portion you rent out and then your exclusion would be allowed on the sale (partial if what we chatted about already applies)

Customer:

okay

Customer:

someone told me about 1031 exchanges

Customer:

but the problem with that is I would have to purchase the other property within 45 days

Robin D :

You would have to designate in 45

Customer:

I"m planning on selling the property and buying several

Customer:

using the proceeds as the downpayments

Customer:

so I gather the problem is that I'd have to identify all of them within the 45 day period

Robin D :

Then you may want to just sale and take your lump. If you time the sale right you may have deductions and depreciation to claim all in the same year.

Robin D :

Hang on

Robin D :

Let me get a great basic on 1031

Robin D :

The above covers the 1031 in basic

Customer:

thank you, Robin

Customer:

you've been super helpful

Robin D :

You are most welcome

Customer:

have a great day!

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7434
Experience: 15years with H & R Block. Divisional leader, Instructor
Robin D. and 2 other Tax Specialists are ready to help you

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