Q:

Subject: Primary residence question

 

Dear Kerry,

This article was very interesting regarding taxes and the 2 year rule.

My question is this: What actually constitutes a property being the primary residence? I have lived with my Mother for 1 1/2 years taking care of her till her death in March 2005.

In May 2005 the house was quite-claim deeded to me.

Does the 2 years start as of the day I moved in with her or the day the house was deeded to me?

I want to sell it and go back to the city I was living in prior  to the move and your answer will help me decide when the sale will occur.

Thanks so much,

A:

 I think you are missing the big picture here.

For the Section 121 tax free residence sale, the time starts when you both own the home and live in it as your primary residence.  This would be May 2005, when the title was put into your name.

However, this is only an issue of concern if you are looking at a profit on the sale.  If you are planning to sell now, you shouldn’t be looking at very much profit, if any.  When a person passes away and leaves assets to others, the cost basis of each item is stepped up to its fair market value (FMV) at the time of her passing.  In your case here, your cost basis in the home would be its FMV as of the March 2005 date your mother passed away plus the cost of any improvements you have put into it since that date.  When you factor in selling costs, odds are that you may even have a net loss.

If you do have a net profit, you should be able to use the pro-rated exclusion of $342.47 of profit per day that you owned and lived in the home if the sale is due to an unusual circumstance, such as the death of your mother or a need to relocate for employment purposes.

As always, you should be working with a tax professional.  This is a very elementary issue that any competent tax pro should be able to help you with.  S/he will be able to help you calculate your cost basis and possible gain or loss.

I hope this helps.  Good luck.

Kerry Kerstetter

 Follow-Up Q:

 Thank you Kerry for your answer.

 I have 1 more question. Since we will probably see a profit over  the step up date for the FMV when we sell. Is there any way I can  utilize 1031 and use the profit to pay for an existing Manufactured  house I own in another city?

 Thanks

A:

 If you have been living in the home prior to its sale, Section 1031 is not an option for you here.

If you have not been living in it and have been using it as a rental or investment property, it could be disposed of under Section 1031.  However, the proceeds will all have to be invested into replacement property that is new to you.  Paying off debts on property you already own is not a valid like kind reinvestment.  You can see all of the rules for 1031 exchanges at www.TFEC.com  This is why you really need to be working with a tax pro who can take your particular circumstances into account.

Good luck.

Kerry Kerstetter