sale of residence question

[mblatour]

I have question for a relative of mine (not currently a client) who has owned an home on 20 acres for 30 years. It's zoned residential (and on a corner lot) and the other 3 corners are zoned commercial and have sold or are selling for big dollar amounts. My client has received an offer for his property in which requires him to rezone commercially. If he sells, and then takes a good chunk of that money to payoff his current home (has 2 houses), does he have to pay taxes on the sale of the commercial home?

Is there anything else I might need to know to help give him some direction?

Thanks!

[Bees Knees]

Two issues:

1) You can only exclude gain on the sale of a home if it has been used as a principal residence for at least two years during the 5-year period ending on the date of sale. A sale of a second home does not qualify. The way you worded it, you said

“If he sells, and then takes a good chunk of that money to payoff his current home (has 2 houses), does he have to pay taxes on the sale of the commercial home?

…makes it sound as if the house being sold is not his principal residence, thus, if that is true, gain on the sale is taxable.

2) Zoning is irrelevant concerning the home sale exclusion rules. Nothing in the code says the zoning has to be residential to exclude the gain, as long as the taxpayer uses it as a principal residence.

[mblatour]

Thanks Bees

I thought there might be something I was missing, but your reply helped to straighten out my concerns.

My relative lived in the home in question for 3 of the past 5 years. The most recent 2 years he's been living in the new home. The home he's selling he has left for his daughter and grandson to live in temporarily. Now that he's had a decent offer on the property he'd like to sell and therefore is concerned about the amount of taxes he'll end up paying.

He was also divorced around 3 years ago and remarried for about 2 years now. He repurchased the home in the divorce. Would his basis for tax purposes now be the amount he recently paid for the home?

So he'd exclude his basis and also exclude $250,000 of gain, leaving the remaining amount he'll be paid for the property to be the only amount he pays taxes on. Correct?

Thanks a bunch!

[Bees Knees]

Almost.

Any amount paid in a divorce settlement for jointly owned property has no effect on basis. The money given to the ex for her share of the house does not increase his basis since her basis is already in the house. In other words, say they bought the house for $300,000 jointly. Their basis is $300,000. Years later they divorce when it is worth $800,000, and she sells him her half for $400,000. His basis is still $300,000, his half of the original basis plus her half of the original basis. The $400,000 transfer is tax-free under Section 1041.

Sorry.