[USER]

Let’s say you buy a house with your spouse for $300k ($250k on mortgage) and after 10 years it has appreciated in value and is now worth $800k.

My understanding is that the $500k in appreciation is tax-free.

Does that mean we can sell it for $800k, pay off the remaining $175k mortgage and then we have $625k in hand that is not taxable?

So then we can take $400k to buy a smaller house in cash and we’d have $225k to invest?

Or let’s say that we want to stay in the same house but want to step up the cost basis.

When it hits $800k, could I sell it to a family member for $800k, pay off the remaining $175k mortgage, and then buy it right back for $800k (with a new mortgage for $175k) to step up the basis and then it would allow me another $500k in tax-free appreciation?

[Amy]

There is no capital gsins tax on your primary residence up to $500,000 per married couple, $250,000 per single.

You subtract origional purchase orice from selling price, then subtract $500,000 (coupke) that is your gain.

$800,000 – $300,000 = $500,000 so no tax

[scen]

2nd scenarios: I’d check with a real estate attorney to make sure that would fly. Both sales (you selling to a relative, and then buying back from a relative) are considered “non-arm’s length” transactions.

You will still incur some sale costs. But also check to make certain that doing so is not considered “self-dealing”.

Not saying this is all totally correct, but those would be along the lines of questions I would have for a RE attorney or be researching.

Would love to know what you find out

[Jim]

I’m pretty sure Scenerio B would technically work… but I’m not sure it’s actually a valuable approach. There’s lots of taxes and fees in a house sale, and you’d end up paying them twice.

Not sure if the tax savings becomes worth it.

Also — keep in mind that the 500k deduction on a primary home sale requires that you hold it for 5 years and live in it for 2 out of the last 5 years.

So, you can step up, but you really can’t stair-step up.

[Carolyn]

Unlikely to see 250% appreciation over a 10 yr period. Houses generally appreciate at the rate of inflation, maybe a point or two higher in most markets.

And why would a family member who has an extra $800k sitting around agree to this questionable scheme?

[Nailya]

First yes up to $500k gain can be excluded
Second no, it should be a non-relative. Also, think about increase in property tax after your basis steps up so much.

Between closing costs and increased property tax I doubt you would come out ahead.

[Graham]

Selling and buying a house like that for tax purposes could be considered fraudulent

[Natalie]

Tax Pro here.
Your cash at closing =/= your basis. Debt payoff is unrelated to gain.

You can exclude up to $500,000 of gain tax free under the 121 exclusion.

If you paid $300k and sell for $800k your gain would be $500k and that would be tax-free (ignoring closing costs).

If you have $250,000 remaining on the loan you receive $550,000 at closing in cash.

You can’t sell to a family member and buy right back, there’s a legal/tax concept called the step doctrine.

Basically, transactions to just avoid tax are invalid if that was their only valid purpose.

[Rick]

First scenario – you can add to the purchase price cost basis a few additional expenses to bring it up. Long term improvements.

Some purchase closing costs. Of you don’t have documentation on these, work on it as it will be easier now than years from now.

[Rebecca]

Should you manage to find this money coining house, don’t forget the transaction fees to sell the house. they can be hefty.

You will likely pay a realtor 3-6% of sale price, and there are legal fees associated with title transfer.

[Bratspies]

Selling it to a family is sticky.
They really scrutinize family sales.

And your family member would have to have cash to buy it. Otherwise you’ll end up in a mortgage fraud situation.

[Author]

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