Calculating capital gains on sale of gifted house?

[Dina Harleth]

Hi everyone,

I'm contemplating selling a house that was gifted to me by my father while he was still alive. I'm trying to calculate what I'd net from the sale of the property (to make a comparison between selling it now or doing a 1031 after renting it out for a couple years). I would have lived in it for 2 years by the time I would sell so I'd qualify for the homeowner's exclusion.

Is the following an accurate way to make an estimate of what I'd net? ?

[Projected sale price (from Zillow) - closing costs (~10k?) - improvements - 250k (single homeowner's exclusion)] X .8 (20% capital gains taxes) = take home cash

Are these all the factors to consider? What about depreciation? I don't have documentation about all the improvements made to the house so I'd have to estimate that. Also, do improvements and repairs I make right before selling the house get deducted as well? (i.e. replacing carpet with hardwood floors).

Ultimately I'm trying to see if it's better to sell the house or to do a 1031 exchange for a multi-unit in couple years. I have no idea how to calculate possible returns on those properties. I have no experience with real estate. Any advice would be greatly appreciated! Thank you!

Thank you!

[Jon Holdman]

You need to discuss this with a CPA. This is a complex situation and you need to avoid additional errors. I'm not one, so I may have missed something in this sitaution.

Read IRS Publication 523.

Your basis in the property is the same as what your father's was. So, you need to figure that out. That is the HUGE problem with gifting real estate. If you inherit it, your basis becomes the value on the date of death. So step 1 is to figure out your father's basis.

Basis starts at the price paid plus purchase closing costs. You really need the HUD-1 (or whatever was in use) when he bought the house.

Then any capital improvements he or you made can be added to the basis. Only improvements. New paint, appliance replacements and a lot of stuff is just repairs and not improvements. There's a list in that publication. AFAIK, documentation for the improvements is required. An estimate of how much you spend will not work. Money you spend prior to sale is the same as at any other time.

When you sell, selling costs get subtracted from the selling price. I estimate these at 6% for RE commissions, 2% for closing costs, and (if required) another 3% for seller concessions. No idea if those are still common in your area or not. Speak to a few agents.

So, then your gain is the net selling price (price - costs) less the basis. You would then deduct the $250K, and the remainder is taxable. This is a long term capital gains, so the rate is currently 15%.

If you rent it, you will need to start taking depreciation. As you take deprecation (or are allowed to even if you don't) that decreases your basis. That increases your gain when you sell. Further, the amount of gain up the the deprecation taken or allowed, whichever is greater, is subject to a recapture tax. That's at your ordinary tax rate, but is currently capped at 25%.

Even further, as you rent you may end up with passive losses. Depending on your AGI, you may or may not be able to use these to offset other income. If not, they become carryforward passive losses. You can subtract these from the gain to compute your tax.

Ready for that CPA?