My parents purchased a home 30 years ago as owner occupied, then 8 years ago turned it into a rental. They are considering selling the renta...

Question

My parents purchased a home 30 years ago as owner occupied, then 8 years ago turned it into a rental. They are considering selling the rental but would face an enourmous capital gains tax - bought the home for $35k and current MV is $400k. Is there a way of minimizing the capital gains tax? Would they have to move back into the house for 2 years, then sell? Or what if they passed the house to me as an inheritance would I get a step up in basis? Making the move back would be extremely difficult because of their poor health conditions.

Answer

Cost plus improvements minus depreciation would be their tax basis. Net sales price less tax basis is their gain. The capital gain is taxed depending on their tax bracket.

Gifting the house to you would just transfer their tax basis to you. So, that would not help. Although the gift to you would allow the property taxes to stay the same.

Moving back for 2 years would be best if they want to sell soon.

Otherwise, they should continue to hold the property until they die, at which time, there would be a step up in tax basis would would allow the inheritance at that tax basis which after inheritance would allow for a minimum gain or loss depending on the net sales price.

It is even possible for a full step up on basis if the property is community property and title is held properly (or it is in a living trust). You will need proper legal and tax advice to get all this done correctly and documented properly to minimize the tax consequences.

I suggest you, or your parents, retain an estate planning attorney and get things planned out now for the best outcome.

Answer

Neal is basically right. Your two options are for them to move back for two years, or place it in a trust so that it passes to you without probate and with a stepped up tax basis to the market value on the date it passes to you. So basically, if they need to sell it before they die, they will have to move back for two years or pay the taxes. If they can hold it until it passes to you via trust (or will, but that is unlikely to be as advantageous as a trust) then that is the better way to go.