Avoiding capital gains tax

[Yoni Udkoff]

Hello all I have a friend who bought a house on contingency. He had a buyer who didn’t lock in and walked away because interest rates went up. He had gotten a loan from a family member to allow him to move forward with his new home. He has been trying to sell the original home to try and break even to cover the costs and loan from his mother. It has not moved. 
he claimes he’s about to get hit with capital gains tax. He wanted to have it sold before that. We offered to rent it from him for the foreseeable future. He’d be open to that but wanted to still avoid this tax. Is there a way for him to do that? Is there something he can do or someone we can seek out to help navigate this. (We also need to move and have decided that we’d like to keep renting for now) I’d like to figure out something that can help us both! Thank you!!

[Dave Foster]

@Yoni Udkoff, if your friend lived in the property for two out of the previous five years, then they can qualify for the 121 exclusion which would allow them to take the first $250k ($500k if married) tax-free.

Now, if they did choose to rent the property to you and convert the property to a rental, that would also allow them to take advantage of a 1031 exchange even after they no longer qualify for the primary residence exemption. He will not have a tax consequence until he actually sells. And that is when the 1031 exchange comes in.

A 1031 exchange allows you to defer all of the tax and depreciation recapture when you sell an investment property to purchase other investment property/properties.

If they don't qualify for the 121 exclusion and need to access some cash then once they complete their 1031 exchange they can do a cash-out refi now or at any time, which would allow them to access a bunch of the equity tax-free. They could use this to pay off their mother and cover any shortfall while you rent it.