MAY 10, 2015 LAST UPDATED: SUNDAY, MAY 10, 2015, 1:21 AM
WIRE SERVICE
Q. My mother-in-law is selling her principal residence in Chicago and will have gains of more than $400,000, as she lived in it for 30 years. Her husband died more than two years ago. Is there any way she can avoid paying capital gains tax on the amount over the $250,000 individual exclusion? What about a stepped-up basis when her husband died? What about putting her daughter on the title? Will they both then get the $250,000 exclusion? What about converting it to a rental for her daughter (who also lives there) and then purchasing another 1031 rental for her daughter? Thanks!
Let’s take apart your question, because we think the answer will become clear.
Start with the word “profit.” Many people assume the sales price is equal to the profit on a piece of property if the mortgage is sold. Not really. The profit is the difference between the cost basis and the sales price. The cost basis includes the purchase price, any structural or capital improvements made to the home (such as re-plumbing, a new roof or a room addition, but not decorating) and the costs of purchase and sale. The costs of sale include the commission, the cost of any advertising and other fees that go into advertising and marketing the home for sale, including staging the home. The costs of the purchase include title insurance fees, lender costs and other expenses related to the purchase of the home. (You can get more information from the IRS and by reading Publication 523.)
Before we get to the true profit, let’s talk about the inheritance issue.
https://mail.google.com/mail/u/0/#label/Personal/1438de9af7ae98f0?compose=14d3d78a668040f4
