Capital Gains on Potential "Secondary" Residence

[SaverBee]

Apologies in advance if this gets wordy, I am an expert at overthinking things

Found an article* that states that we would owe capital gains tax "on part of the sale money based on how long the house was used as a second"

BUT

"The special tax status granted to homes that started out as principal residences, regardless of how the property is used subsequently, also creates a new tax loophole.
There's a way, says Olivieri, that current owners of both a primary residence and a vacation home can sell the properties and claim the full tax exclusion amount for both. "


Ultimately our goal is to find a scenario that will not induce a headache and we will not have to pay too much capital gains tax (if any) when it comes time to sell Home_A or Home_B.

Anyone up for going through the pro's and con's of Scenario 1 and 2 or suggesting a different approach if I'm missing something?? Thanks!!

FACTS:

1. BF currently owns Home_A with his mom as joint tenants and it is their primary residence. BF is claiming the Homeowner's Exemption, not his mom.
2. In 2012 BF and I will be buying Home_B together and getting married and I alone will claim Homeowner's Exemption
3. BF will remain on title of Home_A after purchase of Home_B but will no longer contribute to payments on Home_A, and I will not be added on to title of Home_A
4. We will initially hold title of Home_B either together as married couple, or just me as sole and seperate - whichever minimizes capital gains tax time of sale.

ASSUMPTIONS:

1. Home_A will most likely be put up for sale before Home_B, neither of which would be sold in the next 5-7 years
2. Home_B will be the more likely of the two to have higher gains on sale


SCENARIOS:

1. Purchase Home_B as a married couple and make this both our primary residence, automatically making Home_A BF's secondary residence.
If BF's mom decides to sell Home_A in the far future, and the gains are under $250K, is it possible to NOT split the gains between BF and BFM (since they are 50-50 on title) and just have BFM report 100% of the gains?

Example: Say gains on Home_A is 150K,

If they must split the gains 50-50 then BFM's $75K would not have to be reported (primary residence capital gain exclusion) But BF would have to report his $75K as capital gains since it is his secondary residence.

If they split the gains 100-0 then BFM's $150k still would not have to be reported since it is under 250K, and BF will not have to report anything because his part of the gains is $0. (in case of an audit, if we do this how would we prove that 100% of the gain went to BFM and none went to BF so that they don't come back and say he owes taxes on it)

2. Purchase Home_B as a married wife as her sole and seperate property, it will be my primary residence and Home_A will remain BF's primary residence.
If Home_A sells first then both BM and BMF qualify under the primary residence exclusion and not owe taxes on any gains under $250K per individual.
If we add BF onto title of Home_B AFTER he sells Home_A this should effectively make Home_B BF's primary residence correct?


* www.bankrate.com/finance/debt/new-tax-rules-could-cost-second-homeowners-1.aspx

[mwcpa]

"If BF's mom decides to sell Home_A in the far future, and the gains are under $250K, is it possible to NOT split the gains between BF and BFM (since they are 50-50 on title) and just have BFM report 100% of the gains?"

50/50 is 50/50.... so, if they split the proceeds and split the invest then the gain goes where the cash goes....

"If they must split the gains 50-50 then BFM's $75K would not have to be reported (primary residence capital gain exclusion) But BF would have to report his $75K as capital gains since it is his secondary residence. "

No, if property A is sold within 3 years of "BF" moving out and making property B his primary then his exclusion still is available.

"in case of an audit, if we do this how would we prove that 100% of the gain went to BFM and none went to BF so that they don't come back and say he owes taxes on it"

BFM must get all of the proceeds and BF would have to "gift" his 50% to BFM

[SaverBee]

mwcpa thanks for replying! Home_A was BF's first ever home purchase and neither of us have seen a transaction from seller's standpoint, so your feedback is very helpful. Just have a few more questions if you don't mind!


"50/50 is 50/50.... so, if they split the proceeds and split the invest then the gain goes where the cash goes.... "

Sorry I need to clarify that on title BF and BFM are "joint tenants" but initial investment was by BFM, which is why we have no problem if she were to assume all gain on sale.

This part might be more of a real estate question: upon sale MUST the proceeds be divided amongst all those named on title according to their interest in the property as stated on the deed (since there are 2 here then 50/50). Or is it at this point that BF would state he wants to gift his 50% to BFM (before they cut the check)?

"BFM must get all of the proceeds and BF would have to "gift" his 50% to BFM"

I'm not familiar with this process, how exactly would BF go about "gifting" his 50% to BFM?

[mwcpa]

"Sorry I need to clarify that on title BF and BFM are "joint tenants" but initial investment was by BFM, which is why we have no problem if she were to assume all gain on sale. "

So, this is BFM property and BF has no financial stake in the property..... he paid zero for it......

again, who gets the proceeds from the sale, if it is sold?
if BF gets it, he cannot say I have no gain... and if he gets 50% and put nothing in, then he has no cost basis and the entire amount of proceeds may be income....

you really need to sit with a local qualified tax professional and go over all of the facts here..... a number of years ago I had a client whose Mom put her on her homes title in an effort to "avoid probate" (which she was not going to be able to do for other reasons, just some attorney convinced her this was smart, and charged her dearly to do it)... when it came time to sell, it create such a headache... my client never took possession, never paid a dime, did not have keys, could not enter the premise without permission, was not going to get a dime, was not on the mortgage, etc.

See a pro saver, there are way too many possible issues here.... and these issues need careful analysis, an analysis that cannot possibly be accomplished in a forum like this.

[SaverBee]

Thanks again for the advice, BF does have a tax person he goes to but they could not answer his questions so looks like it's time to look around for another tax pro.