Are either of these kosher?

Jun 30, 2021 Last reply: 5 years ago 3 Replies

(A) Daughter bought a condo in 2011 and lives in it until September, 2018. She rents it out. It currently is worth about $200k more than she paid.If she sells it today, there is no gain as it was her primary residence until 2018. She doesn't want to sell it until next year as she likes the income. Can I buy it from her and then sell it back to her so that she can say that the sale was her primary residence so there is no cap gain tax?



(B) Our (married) residence is currently worth almost $500k more than our cost basis. Can I sell it to my son, write a 100% mortgage, pay him rent while I still live there, pay no cap-gain tax, and then repurchase it next year? This would reset the $500k clock to the new basis.


========================================= MODERATOR'S COMMENT:



Sorry everyone - I had password problems and was unable to moderate any messages for the last several days. I'm back, so please feel free to contribute.


There is something called The Step Transaction Doctrine

"Under the step transaction doctrine, "a series of transactions designed and executed as parts of a unitary plan to achieve an intended result ... will be viewed as a whole regardless of whether the effect of so doing is imposition of or relief from taxation."

In effect, the IRS can treat a series of transactions in a way that acknowledges they were done to avoid taxation. Especially transactions like this between related parties.

Now, as with any tax-related matter, the question is whether it comes to their attention. If it did, I'd say that both transactions will be disqualified.

According to NadCixelsyd snipped-for-privacy@aol.com:

As others have noted, that would scream bogus. Depending on how involved you want to be, you could buy it now, gift her next year's income, then worry about reselling it later.

If you don't expect to move in the future, just stay there and let it be part of your estate. Or sell it to him and rent it from him until you move, at which point he can do whatever with it.

Over and above the other responses (JoeTaxpayer / John Levine) your statement in (A) that there is no taxable gain is incorrect. She can not exclude any gain that is attributable to the depreciation allowed (amount actually taken) or allowable (amount she could have taken) for the rental period. Additionally, the total gain is calculated after her cost basis is adjusted for the depreciation allowed or allowable. What she has in tax parlance is an unrecaptured Section 1250 gain subject to a max tax of 25%.

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