Tax Guru – Ker$tetter Letter

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(Click on image for full size)

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Q:

Subject: Question

 

Kerry,

I am trying to find out if I can claim the exclusion for primary residence ($500,000 for 2 people) in the case where we are selling our home as a fractional. In our case, we would sell 5 shares and keep the 6th.  Our profit would well exceed the $500,000. We would likely deed over the first three simultaneously and then the 4th and 5th would deed over at a later time. 

 

Do you have any info or advice that you could lend?

Thanks in advance. By the way I found you through a Google search.

A:

It should be possible to achieve your goal of utilizing the $500,000 tax free exclusion for the sale of 83.33% (5/6) of your home.However, there are a number of technical aspects that need to be addressed, which means that you need the assistance of both qualified legal and tax professionals.  If you try to handle this on your own, you could very easily screw it up.
 
Some of the issues you need to address with your professional advisors should include the titling of the shares on the house (individual names vs. a separate entity), as well as whether they will represent actual current ownership or a future remainder interest.  If a remainder interest is involved, a sale to any related parties will not qualify for the tax free exclusion.

You mentioned selling at different times.  If the sales take place in different tax years, this could possibly jeopardize your ability to use the tax free exclusion on more than one 1040.  Again, you should discuss this aspect with your personal tax pro

You should also understand that if you do utilize the full $500,000 tax free gain on the sale of 5/6 of the home, you will not be eligible for any tax free exclusion when you sell the remaining 1/6th share. 

You will also need to work with your  personal tax pro to allocate the cost basis of the home to the portions being sold and the one being retained. 

Good luck.

Kerry Kerstetter

Follow-Up:

kerry,

Thank you for responding to my inquiry regarding the fractional sale of my home. This was helpful. 

Preserving a Donor’s Intent

Interesting dilemma.  Technically, you are not allowed to attach strings to deductible charitable gifts.  However, you assume the charity will use it according to its guiding principles and not in some way contrary to that.  Of course, we see these kinds of problems a lot over time, such as with foundations originally funded in support of capitalistic principles using their money to support leftist causes (Ford Foundation, et al).