Sell a rental house-WHAT is the best way to keep from paying lots of taxes on it?

Question

my dad has been renting our family home for over 20 years.the majority of his renters have trashed it.he keeps putting more and more money in it.he is now 75 and needs a break from renting headaches.is there anyway that he can sell it now without paying a ton of taxes?we're also worried that if he ever needs a nursing home they might get it.any advice is greatly appreciated.

Answer 1

You had better hope he does not need that home within 5 years of selling this, otherwise he is hiding assets and committing fraud.

I think it is amazing you are both contemplating how to best avoid paying his fair share of taxes as well as steal tax money from the honest tax payers.

He has to pay capital gains tax only.   He can commit fraud, and it sounds like his ethics would allow that, but there is no LEGAL way to not pay tax on your investments.

Answer 2

Use a 1031 exchange to sell the property, and put the proceeds into a REIT or other property-based investment.  This transfers the investment from the rental property (and its headaches), to a managed real estate fund, which should spit out a regular income.

By rolling the money in this fashion, your father avoids the capital gains tax hit.  If you roll over only a portion of the funds, you would only face exposure on the amounts withdrawn at time of sale (boot).  Another way to reduce this exposure is to take a loan against the property prior to selling it, which would reduce the amount that must be put into the rollover instrument (i.e. the REIT), without exposure to capital gains taxes.  If you are going to take any cash, you had better get all of this done before anyone decides to raise the capital gains rate (check your choices for prez).

You need to speak with a financial planner and an experienced Realtor (in that order) regarding your options.  Once you move the assets into another investment vehicle, I highly recommend that you transfer everything into a living trust.  You will need to speak to an estate planning attorney for that.  Your financial planner should be able to recommend a qualified attorney to help.

Do not wait, because Medicare has a three-year lookback period, if your father should pass in the near term.

Good luck!