Q. I have been trying to sell my condominium unit for some time. The market is poor, and I have had no success. However, we recently purchased a new house, and we must shortly move into that home.
If I cannot sell the condominium, I intend to rent it until it is sold. Is there any problem with this arrangement with regard to not paying tax on capital gains for the condominium? I have bought a house which costs more than the condominium, and I do not intend to depreciate the condominium for tax purposes, as well as declaring rental income. Please advise.
A. The rollover benefits under the tax laws are mandatory. No more than two years can elapse between the time you buy your new property and sell your old one. It is possible to take advantage of the rollover if, for example, you buy your new house this month, rent out your old one for a period of time, but sell it no later than August 1992. Conversely, you can sell your condominium in August 1992, and you have two years in which to buy another property.
If you put your current house on the rental market, the tax laws will continue to protect you only if you have made a good-faith effort to sell your house first, but without success. Obviously, you meet that test. But the mandatory two-year requirement cannot be waived.
Keep in mind that when you rent out your house, you no doubt will take a tenant for at least a year. That will give you only one additional year in which to sell your house. Most people do not want to buy a house that is tenant-occupied, so if you extend a one-year lease for another year, you might have problems marketing the condominium.
Thus, the timing and the logistics of this transaction are quite important.
Additionally, although you did not indicate your age, you can also take advantage of the once-in-a-lifetime $125,000 exemption, if you have lived in your condominium three out of the last five years and are older than 55. In other words, if you have lived in the house for three years, and now you rent it out, as long as you sell the property by August 1992 you are entitled to take advantage of the once-in-a-lifetime exemption.
You certainly have the right to couple the rollover with the once-in-a-lifetime exemption.
However, keep in mind that you may not want to use up the once-in-a-lifetime exemption, because as the name suggests, you only can take it once. It may very well be that the new home will appreciate faster than your old one, in which case you may not want to consider ignoring the once-in-a-lifetime exemption on your condominium and taking it instead on the new property when you ultimately sell that one.
There is one additional aspect to be considered, and that is the availability of the like-kind exchange. If, for example, you rent your condominium and more than two years have elapsed, the condominium is now considered investment property, rather than your principal residence. Under this approach, you can no longer take either the once-in-a-lifetime exemption or the rollover.
However, now that the property is investment property, you have the right, under Section 1031 of the Internal Revenue Code, to use the so-called "Tax Free Exchange." Under this scenario, when you decide to sell the condominium, you can exchange it for another investment property, and this will accomplish the same results as if you took the rollover.
In other words, a like-kind exchange defers tax and gives you the opportunity to use more money, such as the tax savings, to invest in additional investment property.
These issues often are complex, and you must discuss your particular situation with your individual tax advisers.
Benny L. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers also may send questions to him at that address.