Switching Primary Residence to a no-income-tax state

My inclination is to say if you actaully live in Massachusetts, pay the damned tax.

But beyond that, to get the exclusion the house has to have been your residence for 2 of the past 5 years. The obvious thing to do is to domicile yourself in Florida now, then move back to Mass. two years before you plan to sell.

Let's start first with the sale/buyback of your MA home. Even if the transaction could survive scrutiny as a sham transaction (I doubt it would), there would be significant real costs involved. You still have to go through all of the typical closing costs associated with real estate transfer in MA twice.

As to changing your legal residence to avoid MA income tax.. that may or may not work to your advantage. First you need to check MA's residency rules. It's possible that MA may still consider you as a resident even after you establish FL residency because you still maintain a residence in MA. (I'm not familiar with MA rules, but some states make it very difficult to end residency as long as there are still ties to the state.) Second, you could be creating more costly headaches down the line. Once you've changed your primary residence, the full gain on the future sale will be taxable at the federal level AND in MA. If MA follows federal law on taxing the gain of a primary residence (I don't know if it does) that's an additional cost to consider.

Without addressing real numbers, I could easily see where the increased tax (fed and state) on the full gain from the sale of the MA house could be greater than 10 years of MA income tax.

Ira Smilovitz

I would suggest you spend more time in FL, and much less than 6 months in MA. I would also suggest you downsize in MA, i.e. sell you home and buy a cottage or condo or something.

And of course, move all your money, credit cards, medical to Florida.

On 2015-05-19 09:55, lgranowitz wrote: [...]

You can do better than that...

You could avoid ALL cap gain on your MA property, and avoid ALL future state taxes, by becoming a decedent (a matter of when, not if).

Have your cake, eat it too, AND laugh best as the one who laughs last!

Also, since you ask your question in the first person singular, you should know that the home sale exclusion under Sec. 121 for a single filer is $250K, not $500K.

I started to question that too, but he can avoid the real estate broker commission (6% x 2) by doing a double FSBO (him to buyer, then buyer back to him), with the added requirement that his buyer must have all cash, and agree to immediately sell back the property at purchase price plus an agreed commission (which would be taxable income to the buyer).

I still don't know if this would be considered invalid for a Sec. 121 exclusion, and IANAL.

In fact, I would suggest you not set foot in MA for three years. Visit friends and relatives in an adjacent state. Then when MA comes after you for being a resident, you can tell them you have not returned to MA at all for a number of years.

yes you do.

I meant "I don't know" in the sense that I don't know how a court decision on this scenario would turn out. Whether or not I would sign a tax return taking this position, and what I would disclose on that that tax return if so, is a different matter.

I would think it would be invalid for that purpose. It's in the nature of a wash sale (though not exactly). And the IRS does have the ability to re-characterize income to (in their minds) accurately reflect what actually happened.

Selling a house and then buying it back for the same price has no real economic effect or reason to exist. So I wouldn't rely on it to work.

What might work better is for him to sell the house and lease it back for, say, two years. At that point he can buy it back for fair market value. I don't know, but selling the house might actually be more convincing in terms of OP giving up MA residence. Of course he would have to talk to a local MA lawyer to determine that.

Excellent point. And if his estate is over $5.5 million, he should make certain that he dies in 2010. That would save even more.

I think it is pretty clear this would be ruled a sham transaction.

Thanks, it's a clever idea, but far from ideal because: I'd have to go through the trouble of changing my residence three times; i.e. 1. To Florida right now. 2. Back to MA for two years starting two years before I want to sell. 3. Back to Florida immediately after the sale of the MA house. Also I'd be back to paying MA income taxes for at least the two year period that I'm waiting to sell.

By the way, it's my wife and myself so the exclusion is $500K.

I'm also guessing that the capital gains tax may be greater than the current 20%, especially if Clinton wins.

PS I hope I posted this response to your response in the correct place

Right. Assuming that you spend your time 50% in each place, that's just paperwork. Yes, you'd pay Mass tax but it sounds like you're near or past retirement so your income in eight years is likely to be less than it is now, so it's a tradeoff between the 5.15% Mass. income tax on two years of income and the 20% to 30% (fed + state) capital gain tax on the house. Seems to me you'd have to have a rather high income and a rather small house for it nor to be vastly cheaper to pay the income tax rather than the capital gain.

Having seen all the discussion that's gone by, I'm still inclined to say either actually move to Florida, perhaps selling the Mass. house now and renting a smaller place for the minority of time you spend there, or pay the damned tax.

Although doing the same thing with appreciated stock would work. One could realize capital gains in a low-income year to reduce future taxes. I suppose the key difference here is that the home sale takes advantage of a tax exclusion rather than just exploiting the tax rate structure?

But thinking about the wash sale rules for capital losses, it seems that the underlying principle may be more one of not being able to take actions that reduce potential income rather than increase it?

In this case the current year's taxes might be increased, but the overall taxes on the house would be reduced, because presumably OP would want to take the $500,000 exemption twice on the same house.

income and a rather small house for it nor to be vastly cheaper to pay the income tax rather than the capital gain.

Our income is artificially higher than it really is because of mandated IRA withdrawals (RMD) from my wife's and my IRAs (yes, we're both retired). The current capital gain on my MA house exceeds $500,000, so the primary residence exclusion would be maximized. I have no reason to believe that my income will be less in the future.

I want to live in MA for at least 4 but less than 6 months per year. Change in domicile from Massachusetts to FL is no problem.

I want the current house in MA for its convenience (storage for my boats and other toys) and its nearness to the sea. So I won't move to a smaller rented or purchased place. In fact, I'd just as soon pay the damn $100K+ (20% of $500K) before I'd go through the trouble and hassle of even moving to a different but equivalent house. But after 10 years or so I might be willing to downsize.

I don't know how, but I think there is a solution so I can have my cake and eat it too. Perhaps some clever trust setup would work?

I have no plans or wishes to change my status to a decedent:-)

You haven't liked what we've told you already. If you want a different result, the only way you will possibly find one is if you get a lawyer and accountant in person to sit down with you and ask you all the relevant questions. Perhaps there is something, but it will be highly fact dependent. We will never find it in a group like this.

Good luck.

Yes, you're right. I'll probably sit down and discuss my tax dilemma with a real estate attorney. Nevertheless, all of the suggestions in this thread were useful and gave me some ideas to approach a solution from several directions. Thanks to all.

Right. Assuming that you spend your time 50% in each place, that's just paperwork. Yes, you'd pay Mass tax but it sounds like you're near or past retirement so your income in eight years is likely to be less than it is now, so it's a tradeoff between the 5.15% Mass. income tax on two years of income and the 20% to 30% (fed + state) capital gain tax on the house. Seems to me you'd have to have a rather high income and a rather small house for it nor to be vastly cheaper to pay the income tax rather than the capital gain.

Having seen all the discussion that's gone by, I'm still inclined to say either actually move to Florida, perhaps selling the Mass. house now and renting a smaller place for the minority of time you spend there, or pay the damned tax.

=============== Note: Spending approximately 50% in each place could indicate that you have NO primary residence at all. A 60%/40% usage (by number of days) of the two residences would be better. Of course, there are other factors: Where you vote, where your children attend school, where your vehicles are registered, community ties, etc.,....

As property sales are sourced to the state where the property lies, you will never escape MA taxes on its sale, unless you never sell it. I don't know what MA does with estates/inheritances, but at least for the federal tax, would it be better for your heirs to inherit and sell the property at no net gain after a stepped-up basis? In the meantime, you still get benefit of the property taxes and perhaps mortgage interest (as your +1 in the "primary

The suggestion of selling and buying it back does have one economic reality: It resets the base amount subject to property taxes; most likely an increase. So when the rest of the transaction may be considered a sham under income tax, try arguing that with your local property tax assessor.

Someone else suggested a "wash sale" problem. What problem? There is no wash sale because the sale of personal property at a loss isn't deductible anyway.