Selling a house to my son

I have lived in Florida for 5 years but still own property in Minnesota. My son has expressed interest in purchasing the Minnesota house. What is the best solution for avoiding capital gains tax (or at least minimizing them)?

I own it free and clear. It was originally purchased for 130K in 1976. I want to give him a good deal, but the purchase price would still be around 500K. We want to avoid a bank and keep the transaction between us.

I'm willing to be creative if it means paying less taxes!

Thanks in advance for any advice,

Larry

It is legal to sell a house the way you want for any amount you want. It's even legal to gift it.

You can consult a tax attorney, about the best way to minimize your tax liabilities.

You could owner finance it when you sell it to him. That would "avoid the bank". For the capital gains it gets complicated and you need to talk to a CPA, but...

I assume you have not lived there 2 out of the last 5 years, so it is now an investment property for you. You could do a 1031 exchange and reinvest that money in another investment property without paying any capital gains tax. It is not tax free, but tax deferred until you sell the next place. Do you have any interest in buying another investment property?

What I am not sure about is that you would have a capital gain on paper, but you wouldn't have all the money yet because of the owner finance. I assume you can do this as long as you are buying another place. The income from the owner finance note could be paying the mortgage note on the new investment property. That may be totally wrong, we need a more knowledgeable member to give their two cents.

If your son is buying it below market value he will also have a gain when he sells. If he lives there for two years first then he can take 250 tax free (or 500k for a married couple) as long as it is being reinvested into another primary residence. You really just need an hour with a creative CPA! :)

why sell the house....if its paid off just keep it in the family..and help your son find a house in your area for a cheaper price...

I assume you have not lived there 2 out of the last 5 years, so it is now an investment property for you. You could do a 1031 exchange and reinvest that money in another investment property without paying any capital gains tax. It is not tax free, but tax deferred until you sell the next place. Do you have any interest in buying another investment property?

I'm not sure this is investment property. The fact that the property was not lived in as a primary residence for at least 2 out of the last 5 years does not automatically mean that it is investment property. It does mean that you no longer qualify for the 121 tax free exclusion as a primary residence. It could be a vacation home or a second home, which may or may not qualify for 1031 exchange treatment. There is a new ruling out this year (Revenue Procedure 2008-16 (http://www.exeter1031.com/1031_exchange_revenue_procedure_2008_16.aspx)) that addresses vacation properties and second homes as to whether they would qualify for 1031 exchange treatment.

What I am not sure about is that you would have a capital gain on paper, but you wouldn't have all the money yet because of the owner finance. I assume you can do this as long as you are buying another place. The income from the owner finance note could be paying the mortgage note on the new investment property. That may be totally wrong, we need a more knowledgeable member to give their two cents.

Seller carry back notes (http://www.exeter1031.com/seller_carry_back_financing.aspx) can work with a 1031 exchange but it gets more complicated and generally requires that the note somehow be converted to cash in order to complete the acquisition of your replacement property.

If your son is buying it below market value he will also have a gain when he sells. If he lives there for two years first then he can take 250 tax free (or 500k for a married couple) as long as it is being reinvested into another primary residence. You really just need an hour with a creative CPA!

The 121 tax free exclusion does not require that the seller reinvest in another primary residence. The old law under Section 1034 did require this, but the new law under Section 121 does not. It is merely a tax free exclusion up to $250,000/$500,000 in gain as long as you have owned and lived in the property as your primary residence for at least 24 months out of the last 60 months.

The other option not addressed so far is the strategy where you keep the property and let your son live there. You can make sure that your son inherits the property when you pass on and your son will receive a "step-up" in cost basis so that the capital gain goes away.

Hope these comments help.

To make absolutely sure that you will find the right solution for this, consult a professional that tells you what the best way is And then do it yourself to save money.

Good luck! Good deal for your son by the way :)

The other option not addressed so far is the strategy where you keep the property and let you son live their. You can make sure that your son inherits the property when you pass on and your son will receive a "step-up" in cost basis so that the capital gain goes away.

Hope these comments help.

Sounds like the best solution!