Taking the $250K capital gain exemption?

[Rmt]

Hi,

My brother bought a home few years ago at $250K and it's worth about $500K now. He is going to rent it out around $2300 a month.
Obviously, he will have some positive cashflow due to the low mortgage payment.

We were wondering if it makes financial sense for our family if he sold it to me at $500K, so he can take the $250K personal capital gain exemption of his primary residence before it becomes an investment property? I would take out an investment loan and this home will most likely be cashflow negative for me at this price, but I can depreciate the home based on my income.

We are looking at what's best for the family as a whole (he's not getting married, and goal is to maximize wealth for our family and eventually passing it on to my kids).

The positives I can see is that he can take that exemption now, he doesn't have to pay additional rental income tax, and I can get some tax deductions due to negative cashflow. The negative is that I'd have to pay investment loan interest, and roughly double the property tax. Question is also whether this all even makes sense since he can always pass on this property tax free to my kids via the estate tax exemption? Also does things change if he wants to purchase something else with the proceeds of the $500K?

Thanks for helping!

[cchrissyy]

No need for all this hassle and raising the property taxes and interest costs.

if/when he dies, the cost basis increases to present value, meaning you can sell it and nobody ever pays the tax on the gains.

if he wants to sell it while alive and get a different investment property, he can do a 1031 exchange to avoid paying taxes on the gains from this house, and later when he dies holding that other property, those deferred gains disappear in the same way I wrote above.

[Rmt]

Thanks so much for the response.

I'm glad I asked!

[Mr Mark]

Why doesn't he simply sell the house for a nice tax free capital gain rather than renting out? if the house is worth $500k and will only rent for $2300/m that doesn't sound like a very good rental investment.

The money could be invested instead.

[SeattleCPA]

Why doesn't he simply sell the house for a nice tax free capital gain rather than renting out? if the house is worth $500k and will only rent for $2300/m that doesn't sound like a very good rental investment.

The money could be invested instead.

+1

BTW I think missing the Sec. 121 exclusion (which is what OP references) is one of the cardinal sins of real estate investing.

It might even make sense to sell the brother's house, buy the one next door, and then depreciate the higher basis property.

[Rmt]

Why doesn't he simply sell the house for a nice tax free capital gain rather than renting out? if the house is worth $500k and will only rent for $2300/m that doesn't sound like a very good rental investment.

The money could be invested instead.

Hi Mark,
In addition to a couple of other minor reasons, the most important being that most people invest in this area for the capital gain potential and not for the rent income. It will most likely keep growing in value.

[Rmt]

Why doesn't he simply sell the house for a nice tax free capital gain rather than renting out? if the house is worth $500k and will only rent for $2300/m that doesn't sound like a very good rental investment.

The money could be invested instead.

+1

BTW I think missing the Sec. 121 exclusion (which is what OP references) is one of the cardinal sins of real estate investing.

It might even make sense to sell the brother's house, buy the one next door, and then depreciate the higher basis property.

Hi, not sure I get it... so how come I wouldn't just buy his condo instead of your proposal of him selling to someone else?

[seattlecyclone]

The point is that if he wanted to own a rental property in his own name he could do better by selling the one he has, buying an identical one next door, and claiming a higher amount of depreciation each year.

What would he do with the cash if he sold the home to you? Seems like taking out a bank loan isn't necessarily the best way to preserve the family wealth.

[SeattleCPA]

The point is that if he wanted to own a rental property in his own name he could do better by selling the one he has, buying an identical one next door, and claiming a higher amount of depreciation each year.

What would he do with the cash if he sold the home to you? Seems like taking out a bank loan isn't necessarily the best way to preserve the family wealth.

Agree with Seattlecyclone. And, sorry, but I think my original comment was kind of tangential and so confusing. Ugh.

I was just commenting on the current owner's idea to ignore the Sec. 121 exclusion (which is the law that creates the $250K or $500K exclusion.) That seems very suboptimal.

Regarding the idea of OP buying a rental, that's a different question.

Regarding the important issue of what current owner does with proceeds, agree that's another important issue.