1031 Exchange Grandma's House

[Jim Sestito]

Situation:

Grandma is moving out her longtime home in Foxboro Massachusetts a suburb 45ish min south of Boston.  

It is a 3 BD / 2 1.5 BA House with (market rent $2,300) an attached 1 BD 1 BA in law currently renting for $1,000 / mo

She has no debt on the house.

The home is already in an estate featuring my mother and her 2 siblings.

The home is dated, on a busy, but in a desirable town / school district.

Zillow Estimate 400K... I think it would go closer to $375 ... her tax person estimate 80K wack in taxes if she were to sell.

Enter 1031 Exchange ?

With all data above - looking for thoughts on using 1031 tax exchange to trade up for another investment property to keep the wealth building asset in the family for generation to come.

Since a 1031 must be done with an investment property this would require us to rent the property (the main house and the in law) for one year.  

Any knowledge on the subject would be greatly appreciated.

Best - Jim

[Bill B.]

@Jim sestito

No matter what I say listen to Dave, he’s an expert. But my understanding of your situation is...

Sell for $375k subtract $25k in costs subtract $250k tax free profit leaves only $100k. Now subtract what she paid for it. That’s what you owe 15% capital gains on. If she bougth the house for one dollar she owes $15k. If she paid $100k or more she owes zero. 

Only monkey wrench is you say it’s been partially rented. If she’s been declaring that income and deducting depreciation she’ll have to recapture that at 25% but that “part” could probably be 1031’d. Ask @dave foster. In which case you again wouldn’t have any taxes due. If she hasn’t been depreciating it but has been declaring the income you’re going to need an expert. Either way if you’re done with the property I’d say sell now and get $250k tax free. Way better than tax deferred.