I need help with retirement and tax strategy!

[Gwen Speicher]

My husband & I bought a 4-BR home for $75K cash in 1988, and over the next 15 years put $50K+ into improvements, including construction of a detached home office. We took the home office deduction for several years off and on.

We also took out/paid off several mortgages to buy/sell rental properties over the years. The last joint mortgage ($310K) helped finance construction of 3 spec houses in 2002-2005.

In 2003 we separated, divorced in 2005. My ex got the spec houses; I got our primary residence along with the $310K mortgage. I have never remarried.

In 2008, I refinanced into a $300K 30-year Home Ownership Accelerator HELOC. My balance is now $188K. This type of financing is only possible on a primary residence, but is transferable if I sell and buy a different home.

Lots of depreciation. Is it now a rental property?

I am self-employed and have deducted the office since 2005, including prorated property taxes, improvements & depreciation. Since I assumed the $310K mortgage, I use that as the cost basis.

In 2009, I started renting out 3 furnished bedrooms in the main house, and claim prorated expenses, property taxes and depreciation on Schedule E. I still live in the 4th bedroom and share all the common areas with my 3 lady renters.

I hope to retire in less than 2 years. 

My home is now worth nearly $600K because it’s a turn of the century house in a very desirable location in a popular tourist town. With all the depreciation I’ve deducted over the years and the increase in value, below are the options I see if I sell (comments welcome!)

1. Bite the bullet and pay capital gains taxes on $50 to $100K of the profits. Will the IRS dispute my cost $310K basis? They haven’t so far.
2. Hold onto this place and let renters keep paying the mortgage until I die. I’m already tired of the maintenance and sharing my space.
3. Quickly find someone to marry, and ditch the renters for 2 years before selling.
4. Add onto and convert my office into a proper cottage where I can live in solitude while renting out the main house, unfurnished. (Lots of heirloom furniture to sell, hard to part with.) This would increase the property value, but I’d be subject to stricter landlord/tenant laws.
5. Convert the house to a short-term vacation rental, if I can meet all of City Hall’s stringent criteria. Maybe more lucrative, probably more work. I’d live in the renovated office/cottage if/when necessary.

Other questions:

If I sell and buy a condo with the profit, would I avoid capital gains? Could I do a 1031 exchange since this has been a partial rental for so many years? What about forming an LLC, other corporation or some kind of a trust?

This is probably way too much information and too many questions, but I’m throwing it all out there to see what comes back…