Google Answers Logo
View Question
Q: Rental house and tax liablity ( Answered,   2 Comments )
Subject: Rental house and tax liablity
Category: Business and Money > Accounting
Asked by: kiku1234-ga
List Price: $20.00
Posted: 19 May 2005 08:35 PDT
Expires: 18 Jun 2005 08:35 PDT
Question ID: 523308
I purchased a rental in '85 for $203K as part of an exchange. Now, Silicon
Valley Mkt Value is $600k. Current loan at $120K at 9%. I want to help my
kids get in a house. Buyers (son/wife) propose a new loan and a seller
carryback.  I hesitate to commit because of the big unknown, Capital
Gains Tax.  Sales price will be about $500K.  What would be the best,
and cleanest way to make this sale work with the least exposure to
capital gains liablity. Not interested in another exchange.
Subject: Re: Rental house and tax liablity
Answered By: taxmama-ga on 21 May 2005 17:55 PDT
Dear Kiku, 

From your question, you're saying that your son and his wife
want to buy the house you've been renting out all this time.
Is that correct?


You don't say how much your basis (tax cost) is in the house.
Nor do you say how much depreciation you've taken. 

Since the purchase was part of an exchange, you wouldn't have
bothered unless the profit was at least $50,000, right? 

So, Let me assume your tax basis in the house was about 
$160,000 and the building value was about half - or $80,000.

You would have take about $58,000 in depreciation over the
last 20 years (3.636363% x $80,000)

In short, your tax situation is this:

Tax Basis: $160,000 - $58,000 = $102,000

(The balance of the loan doesn't really matter here)

Sales price -   $500,000

Less tax basis   102,000

Profit =     $398,000

Less all the selling and escrow costs.

Of that profit (federal rates only - add state tax rates, please)

$ 58,000 is ordinary income taxed at maximum 25% rate
$340,000 is capital gains income taxed at capital gains rate - probably 15%

So, for IRS purposes, your worst case tax is about $65,500

After you pay off the loan, taxes and escrow costs, you'll still 
have over $300,000 left. 

Now, what could you do with your children? 

1) You could gift it to them and not have any tax at all - and no money.
But they take over the mortgage.

2)You could sell it them on an installment sale. That might reduce the
tax rates if you're in a low enough tax bracket. Remember, that 25% rate
on the depreciation is the highest rate. If you can get your personal
tax rate down to 15%, that depreciation rate will come down, too. 
But, you will be spreading the payments over 10 or 20 years and
you wont' get your money now. 

3) You could do what Daniel suggested and rent it to your children
with an option to buy. But they wouldn't get the tax or credit 
benefits of owning, as you'd all like for them. 

OR - here's an idea. 

Sell them your present house. You've already lived there for two years. 
You have $500,000 of gain, none of which is taxable. 

You move into the rental for two years - then trade back.

Everyone wins and there's little or no tax at all. 

In the final analysis, yes, go see a good tax pro to work out details. 

But, at least you know your approximate tax bill now. 

best wishes

Your TaxMama-ga

P.S. Remember, this is only an estimate based on the outline you provided. 
Have someone look at the real numbers based on actual facts.
Subject: Re: Rental house and tax liablity
From: daniel2d-ga on 19 May 2005 21:58 PDT
Best course of action:  Move into the house for two years, converting
it to personal use, and then sell using the primary residence
exclusion ($250,000 single, $500,000 married).

Next best course:  They can rent with an option to buy and you can
credit x% of their rent towards the purchase price.  You can also gift
so much per year to them as a couple if you want to do that.

Botton line is there is a lot of money involved here.  Pay a few bucks
and the professional advise you need.
Subject: Re: Rental house and tax liablity
From: myoarin-ga on 20 May 2005 06:49 PDT
Daniel is right, you need professional advice.  At the moment, you
have relatively little invested in the house (purchase price less
debt), a situation to be preserved if at all possible for the
transfer.  If you are in a position to look at this as a gift in
advance of inheritance (hopefully decades away), this might allow a
more favorable solution, maybe first gifting 50% to your wife, so that
you both can share in giving the property.

I am no expert and this is no professional advice (see disclaimer below).

You need expert advice, but perhaps this site helps orient your thoughts:,,id=98968,00.html

Important Disclaimer: Answers and comments provided on Google Answers are general information, and are not intended to substitute for informed professional medical, psychiatric, psychological, tax, legal, investment, accounting, or other professional advice. Google does not endorse, and expressly disclaims liability for any product, manufacturer, distributor, service or service provider mentioned or any opinion expressed in answers or comments. Please read carefully the Google Answers Terms of Service.

If you feel that you have found inappropriate content, please let us know by emailing us at with the question ID listed above. Thank you.
Search Google Answers for
Google Answers  

Google Home - Answers FAQ - Terms of Service - Privacy Policy