It appears that if I sell my house in California that I have not lived in for 10 years, I will owe on any appreciation a 20% Federal capital gains and 9% Oregon.
There appear to be at least two options to avoid capital gains:
Live in the Calif. house for two years as a principle residence for two years before selling and moving back to Oregon
Do a 1031 Exchange for property closer to where I am now in Oregon, rent the property out for at least a year and then live in it at least two years as a principle residence before selling.
(For those not familiar with the 1031 Exchange, it is a little tax dodge written into the tax code in 1991 to allow the swapping of identical types of property without having to pay capital gains taxes. There are stringent time requirements to complete the transactions and the replacement property much be of equal or greater value than – I am assuming here – the equity in original property.)
I am too deaf to just call up a tax guru on the phone, so I will ask if anyone can give me any insight into these transactions so I won’t be too ignorant when I go see someone. There are several articles on the web, but none are totally clear on just what “great than or equal to” amount is. One article seems to imply that it is “all funds realized from the sale of the property”; however, other articles seem to imply that it is only the amount of appeciation adjusted for the costs of selling and any depreciation declared on the property (I am guessing it is just the adjusted appreciation – selling price minus the “basis” and allowed costs). Does anyone know what the minimum value of the replacement property must be to escape capital gains taxes? Is anyone familiar enough with this gambit to know what the “gotchas” might be?
Edited 4/22/2003 10:34:26 PM ET by CaseyR
Replies
As I understand the tax rule of a 1031 exchange, all net sales proceeds must be invested into like properties. You can invest in multiple properties with the proceeds, such as putting 20% down payments on multiple properties and getting loans on the remaining balance (hey, I'm a loan officer, after all <g>)
You must also inform the title company that you plan to do the 1031 exchange in advance of the transaction, and they must hold the money after the transaction. You then have either 60 or 90 days to turn in a list of properties that you are interested in purchasing, then you only have a limited amount of days thereafter to actually close on the properties.
I'm not for sure of your idea to rent the place for a year, then live in it for 2 to avoid capital gains taxes, although it sounds doable. I'll end with the disclaimer that I always give my customers. "I'm not allowed to give legal advice or tax advice, and I'd suggest contacting the appropriate professional." See ya.
A couple of things.
First a sale of the CA house would be taxed on CA income taxes and I believe that you should be file an income tax return on the rental income now, but not 100% sure. After you pay the CA tax you might also have to show it on your OR return and you might get credit for the CA taxes.
If you do the 1031 exchange and then convert it to personal use for 2 years you will still have to pay 25% tax rate on the recapture of the depreciation taken since 1997 (I think that is the date). There might be others. Also the 1031 exchange might still trigger CA taxes, specially since it is out of state.
You should be asking this in some tax forum. Do a google on TAX FORUMS and you will probably find a couple.
Here is one go.compuserve.com/account
You will need an ID and password. If you have an AOL account that will work or you can get an AOL instant messanger account.
There are several people on the forum that are tax specialist and some are in CA and WA or OR.