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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 6182
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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As recent "empty-nesters"planning to downsize. What legal

Customer Question

As recent "empty-nesters"planning to downsize. What legal ramifications, if any, if we move into a house my wife & her sister inherited from their deceased parents. The 2 sisters own it completely 50/50, it is paid off many years ago. It is in Sunnyvale, CA. We are currently renting it out. Can we move in, pay sister 50% of rent & continue to split payment of taxes & insurance? Can we do this without incurring a reassessment of property value & taxes? I believe answer to these questions is Yes, but I’d like some official corroboration.
JA: Because real estate law varies from place to place, can you tell me what state this is in?
Customer: City of Sunnyvale, Santa Clara county, California We currently live 5 miles away in Saratoga, CA
JA: Has anything been filed or reported?
Customer: Not sure what U mean, but don't think so other than transfer of deed from parents to sisters
JA: Anything else you want the lawyer to know before I connect you?
Customer: no
Submitted: 2 months ago.
Category: Tax
Expert:  Attyadvisor replied 2 months ago.

Welcome to JA and thank you for your question. I will be the Attorney that will be assisting you.

Expert:  Attyadvisor replied 2 months ago.

You are correct the answer is yes.

Expert:  Attyadvisor replied 2 months ago.

Provided the title remains the same there is no requirement for reassessment.

Expert:  Attyadvisor replied 2 months ago.

Please do not hesitate to ask me any additional questions that you may have with regard to this matter as it would be my pleasure to assist you.

If you would be kind enough to rate my service positively so I will receive credit for my work I would appreciate it.

YOU DO NOT NEED TO PROVIDE A NEGATIVE RATING TO RECEIVE A REFUND.

Customer: replied 2 months ago.
OK, good, but how does it affect IRS Homeowners Tax exemption?
If sister-in-law views as rental property for her taxes, but we view as primary residence?
Can she continue deductions of 1/2 of expenses, taxes & depreciation?
Expert:  Attyadvisor replied 2 months ago.

That is an excellent question. It depends on how the sister wants to handle this matter. In essence you are renting. If you want to change the status for the exemption that would trigger a reassessment.

Customer: replied 2 months ago.
not sure I understand...could you please elaborate on your last sentence?
Expert:  Attyadvisor replied 2 months ago.

Are you wanting to declare this as your primary residence?

Customer: replied 2 months ago.
Can a rental house BE your primary Residence?
Do we NEED to declare one?
Is there a Legal/Tax definition of that and what would be the benefit?
Could we just say we are renting and not have a Primary Residence at all? (we plan to travel a lot...)
Expert:  Attyadvisor replied 2 months ago.

“While converting a rental property to a residential property is as simple as just moving in, the financial implications are much more significant. Converting it from a rental to a residence removes your ability to deduct expenses from the property from your taxes. It also changes how it will be treated when you sell it. While you may gain the ability to take advantage of the personal residence capital gains shelter, converting it won't eliminate your depreciation recapture tax liability.

Discuss your strategy with an accountant. She can help you understand the implications of your decision to convert your property as well as helping you plan to minimize your tax liability when you sell the property. If you are planning to convert a property that you acquired through a tax-deferred exchange, an accountant consult is especially valuable, since the IRS looks at those conversions very carefully.

Stop renting the property out to tenants. A property becomes residential property once you start living in it for more than two weeks a year or more than 10 percent of the days for which it would be available to rent. In many cases, you won't be able to throw the tenant out at a moment's notice, though. You need to comply with the terms of the lease as well as with your community's rent control or eviction laws. San Francisco, for example, limits an owner's ability to refuse to renew leases with tenants in rent-controlled apartments.

Report the former rental's property tax and mortgage interest on your Schedule A form as a part of your personal itemized deductions. Since it is no longer a rental property, you can no longer report it on Schedule E. If you convert the property in the middle of the year, report on the property on both forms; schedule E for the first part of the year when the property is a rental, and Schedule A for the remainder of the year when it's a residence.

Continue renting the property to temporary occupants for up to two weeks per year, if you wish. The Internal Revenue Service lets you rent out a personal residence for up to two weeks per year without incurring any tax liability. You won't be able to write off your expenses for those two weeks, but you also won't have to report the income.

Live in the property as your personal residence for at least two years before you sell it. If you do this, you will be eligible to use the personal residence capital gain exclusion. This exclusion lets you exclude $500,000 in profit on the sale of your house if you're married, or $250,000 if you are single, from your taxes. In other words, if you're married and sell the property at a $475,000 profit, you won't have to pay any taxes on it.

Pay your depreciation recapture taxes if you sell the property for more than its adjusted cost basis less any depreciation you claimed, since the capital gain exclusion doesn't apply to depreciation. Your recapture tax will be equal to 25 percent of the depreciation that you claimed while the property was a rental, plus California income tax as well. For example, if you bought the property for $200,000, claimed $50,000 in depreciation and sold it for $300,000, you would have to pay the 25 percent federal tax and California state income tax on the $50,000 in depreciation. If you sold it for $180,000, you'd have to pay the tax on the $30,000 difference between your depreciated basis and your selling price." http://homeguides.sfgate.com/convert-real-estate-rental-personal-residence-72259.html

Expert:  Attyadvisor replied 2 months ago.

This is where it becomes murky and she would want to check with her accountant. In essence it would be your primary residence. With both your wife and her sister on title we don't want any tax issues.

Customer: replied 2 months ago.
Thank you for that answer - it anticipated some of my further questions, I guess.
But I don't think you answered the actual questions I asked about Primary Residence...
Expert:  Attyadvisor replied 2 months ago.

I see why answer confused you and I apologize. Provided title stays the same there will be no reassessment.

The only issue would not involve reassessment.

Expert:  Attyadvisor replied 2 months ago.

Yes, this will be your primary residence and no since title is not changing there would be no reassessment. As far as any IRS deductions I cannot answer for that for the sister.

Expert:  Attyadvisor replied 2 months ago.

If I am making this more confusing I can opt out for another attorney to assist and we can out this in the tax category. Would that help?

Customer: replied 2 months ago.
I think that would be good.
But in fairness, will I be able to credit/review both of you?
Expert:  Attyadvisor replied 2 months ago.

Probably not

Expert:  Attyadvisor replied 2 months ago.

I appreciate the fact that you asked. I just split two of my questions where I took over. I don't think many Attorneys do that. You can always contact customer service.

Expert:  Attyadvisor replied 2 months ago.

This is the number for customer service.

US/Canada1-***-***-****

Let me get you switched. It is more important that you receive a helpful answer.

Expert:  Stephen G. replied 2 months ago.

Another expert here - a retired CPA

Here's the problem I don't see addresses in the previous response related to the income tax aspect of your questions:

Can a rental house BE your primary Residence?
Do we NEED to declare one?
Is there a Legal/Tax definition of that and what would be the benefit?
Could we just say we are renting and not have a Primary Residence at all? (we plan to travel a lot...)

First of all, yes, a rental house may be a primary residence, but that only relates to 1/2 of the property and has no tax implications for you.

Since your wife & your sister-in-law own the property, here's how it will work for tax purposes:

Once you move into the house that your wife owns 1/2 of, that 1/2 will be considered your primary residence from an ownership standpoint. The other 1/2 will be your sister-in-laws rental property, as well as your rented 1/2 primary residence.

How you determine that you are going to split the expenses is determined based upon the ownership interests.

For example, if you pay 100% of the expenses of the property since you are living in it, 1/2 of the expenses would be deemed to relate to your primary residence and to the extent deductible (for example the real estate taxes) 1/2 of what you pay would be deductible on Schedule A & the other 1/2 should be paid by your sister-in-law and be considered by her as part of the rent that you pay her.

Most of the rest of the expenses, that you pay 100% of, would not be deductible for income tax purposes for your primary residence, say for homeowner's insurance, utilities, maintenance, landscaping, etc.

So, from a tax standpoint, the best way for both of you to handle that is for you to pay 1/2 of most of the expenses as relating to your primary residence & the other half should be paid via your rent to your sister-in-law who can then pay her 1/2 and deduct them against the rental income you pay her for her 1/2 of the property.

If and when it comes time to sell the property, 1/2 will be deemed as your principal residence and as long as you meet the requirement of living in the property as your principal residence for any 2 out of the previous 5 years ending on the date of sale, you will be able to exclude up to $500,000 of capital gain on your wife's 1/2 of the property as long as she files a joint return with you for the year of sale.

Your sister-in-law will report her 1/2 of the proceeds as a sale of rental property and be taxed accordingly.

In your case, based upon a previous comment you made, the time that you travel away from the property, will count as occupying the property as long as you don't establish a permanent residence somewhere else.

Let me know if you have any follow-up questions.

Steve G.

Expert:  Stephen G. replied 2 months ago.

Just checking in...................

I see that you have had a chance to review my response/comments.............

Do you have any follow-up questions? If so, please let me know.

If not, I would appreciate it if you would take a moment to rate my response as that is the only way I will receive my share of the payment you've already made to the site for assisting you.

Thanks very much,

Steve G.

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