Be Content With the Existing Tax Breaks

Question: I bought my home many years ago for about $55,000. Today, it is worth more than $450,000 because it is in a high-demand neighborhood. If I sell, I will owe a huge capital gain tax. Is there any way to avoid paying tax on my profit exceeding $250,000 (I am single, never married)?

Answer: Many sellers would love to have your "problem" of a $345,000 capital gain with a $250,000 principal residence exemption and only a $95,000 taxable long-term capital gain. With the federal long-term capital gains tax rate of just 20%, plus any state taxes, you are in an enviable position.

The only way to avoid tax on that $95,000 profit exceeding your $250,000 home-sale exemption would be to:

(a) convert your home to a rental property,

(b) make a Starker delayed tax-deferred exchange under Internal Revenue Code 1031(a)(3),

(c) have the proceeds held in trust beyond your constructive receipt and

(d) use the money to acquire a qualifying rental property of equal or greater cost.

Do you want to go through all that hassle just to save capital gains tax on $95,000? I don't think so. Pay the tax and be happy. For more details, please consult your tax advisor.
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Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to P.O. Box 280038, San Francisco, CA 94128. Bruss suggests consulting an attorney or tax advisor before making important real estate decisions.