Capital Gains Tax on a Secondary Home

[Nick Boring]

Hello BP and thanks in advance for your help! 

From my understanding, secondary homes are not exempt from the capital gains tax, and if you are not renting it out then you cannot do a 1031. However, this client has had a relative living in it for the past 3 years (they have owned the property for 3 years), and they have been paying around $900 a month to live there. But my client has not been reporting the income as a rental property though. Is there a legal way to turn this into a rental property so that they can save some money on the sale of the property?

I was thinking if they backdated a lease agreement with their family member and then planned to properly report the property on their taxes in early 2021 this might be enough? Let me know if you guys have any ideas!

Thank you.

[Kristin Kiddy]

So important that you speak with a CPA.  Even if you can back date the lease, your friend has not been declaring any depreciation for their "rental".  But when you go to sell, the IRS requires depreciation recapture regardless of if you took it each year or not.  

If you are going to pursue this change, it would probably be best to amend those years of tax returns.  Depending on costs of a mortgage, there might be a loss each year that your friend could be rolling over to use in the future against capital gains.  

But be careful, if your friend used their home for more than 14 days per year, the tax laws change considerably.