Need a home in CA in exchange for one in AZ

[Islah Barney]

I need to sell my mother's Sun City, AZ home creatively for a couple of reasons. 1. We're from CA and our support system is here. 2. Mom is fully insured w/Medicare (Parts A-G), BUT it pays $0 for long-term care (skilled nursing is only temp & not her need). In CA they offer Medi-Cal. This program DOES offer LTC, but you can't have any assets. 3. Mom is staying in a very nice residential board and care home near me. I'm there daily, and now that she's on the right medication, I'm confident I can provide the same level of care with maybe a graveyard caregiver. I have 2 teenagers, so we need more bedrooms and space. The criteria for the exchange states one can't live in the primary home for more than 14 days per year. My mom has been with me since Sept 2024. If she can't meet the occupancy/rental criteria, can we quickclaim deed it to me, then find a home in CA for the exchange?  

-TIA!

[Max Gallagher]

What is the value of the property and cost basis? I'm assuming your mother's income is very low, do you have a sense of what the tax impact might be if you sold outright, not via a 1031? Remember there is an exclusion available of $250k of capital gains for the personal residence of a single filer (assuming 2 of the past 5 years she's lived there). If she's married or spouse passed away within the past 2 years she could likely claim a $500k exclusion. 

Obviously there are a lot of interconnected factors at play here.. real estate, Medicaid/Medi-Cal eligibility, taxes, and estate planning. Has the AZ property been used as a rental at all up to this point? The exchanged property needs to have been used as an investment property and the intent needs to be to use the new property for investment purposes as well.

Instead of your mother doing her own exchange, it sounds like you're thinking of ways to be gifted the property, rent it, and do a 1031 exchange of your own down the road? In this scenario, it's important to consider that there is a five-year look back with Medi-Cal and any assets transferred (including through a quick claim deed) within five years of applying for Medi-Cal could be penalized, potentially delaying or denying eligibility. It's also important to consider that you would be gifted the basis of the property and lose the ability for a step up that would otherwise be available if inherited. Depending on your long-term plans, the tax impact of losing that step up should be balanced with higher healthcare costs. Nobody wants to pay higher taxes or medical costs but sometimes its worth picking the less costly of the two and calling it a win. 

There might be exceptions to the asset transfer rules if you can demonstrate that you provided care for your mother that allowed her to avoid institutionalization for a certain period. This is complex and requires meticulous documentation and well beyond my area of expertise. This is something you MUST discuss with an elder law attorney specializing in Medicaid/Medi-Cal.

Based on what I'm reading an exchange to another piece of real property under your mother's name is going to raise red flags with the IRS if the AZ property isn't showing rent on a recent tax return and gifting will potentially cause complications with Medi-Cal eligibility.

Let me know the details on the AZ home (FMV, cost basis, rental history) and I can point you in the right direction.