Long time landlord on paper but not in essence... so please bear with me if I sound naïve and deserve a face punch or two..
So here is the deal. My husband "bought" a house before we got married, as an investment property. Actually it was my MIL putting down the down payment, but DH applied for the mortgage because his credit was much better and got great interest rate. It could have been a risky move I know, but it was water under the bridge and MIL has been living up to her promise.
On a day to day basis, the house has been rented to MIL to run a small business in, she paid for all the upkeep and mortgage/insurance/etc, and the "rent" is to cover all that expense so it's pretty much break even each year, on paper. Although we don't really get or spend anything at all. Since the mortgage is in DH's name, we file for it under our tax return, and we deduct the interest to lower tax bills.
Now it has come to a time that MIL is considering downshift and retire over the next 2-3 years, and selling the house has become a real possibility. My question is, over the years as an investment property, the house has been depreciated on a schedule that lower the tax base, and if we sell at market value there will be some decent gain that we have to pay lot of tax on.
Is there any way we can reduce that tax? I am thinking, for example, maybe MIL sell her primary residence if she can let that go, and live in the investment property, and we claim it as a second home for 2 years, then we sell. Will that reset the cost base? Is that legal?
What if MIL is too attached to her current house and don't want to move? What do we do then? DH and I have over the years grown into a relatively high income bracket and forking out all that tax out at current level will be painful.. especially we never really see a dime come in, although we did reap the benefit on our tax returns.
The house is a single family home, I guess it can be rented out but barely breakeven... and we will run the risk of actually losing money, and it's 2 hours from our house, if MIL retires for good, nobody is going to take care of it, so we probably have to sell it. The good news is that we still have a couple of years to go before pulling the trigger, and any advice for tax reduction maneuver is much appreciated!