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This is the US.

As far as I'm aware as a single person you have a $250,000 capital gains exemption if I lived in the house two of the past five years. I'm planning on moving out of my primary residence and renting it but prior to doing so would like to "up" the basis while it's still my primary as I currently have around $200,000 in equity and am approaching the $250,000 limit. To keep it easy let's say I purchased the property for $100,000 and it's now worth $300,000.

  • Could I sell it to a family member at fair market value, $300,000. They hold it for a few months then sell it back to me at fair market value ~$305,000. No one pays any real capital gains and my basis is now "upped" to $300,000.
  • Could I somehow do the same with an LLC so I don't involve a family member. Do I legitimately have to have and move the money? I could get a mortgage but it adds cost.
  • Can I use an attorney who does explicitly the above? I assume these services exist. They would draw up a contract to sell it back to me.

The thought is now that my basis is upped to $300,000 if I sell it down the road for $500,000 while it's a rental I only owe capital gains on $200,000 vs $400,000. If I decide to move back in for 2 years I can now go all the way to $550,000 without ANY capital gains vs $350,000.

Edit: This was flagged as a duplicate. In the other question they were talking about gifting it to parent. In this question I am selling it for fair market value and purchasing it back. These would be legitimate transactions with legitimate exchange of money. We would also wait out any statutory required amount of time.

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  • do they have a spare $300K? getting a mortgage takes time and money.
    – mhoran_psprep
    Commented Aug 11, 2021 at 19:27
  • @mhoran_psprep - Let's say we both do. Ideally we'd rather somehow do it without a physical exchange of money (I can do a private mortgage or something) but if that makes it 'work' we can move 300k around.
    – asdfasdfasfdhsadf
    Commented Aug 11, 2021 at 19:30
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    Not really moving the money is the thing that will get you in trouble. The IRS won't consider it a real transaction.
    – mhoran_psprep
    Commented Aug 11, 2021 at 19:45
  • @mhoran_psprep That makes sense. It's a shame you have to have the money to do this in the first place.
    – asdfasdfasfdhsadf
    Commented Aug 11, 2021 at 19:56
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    Read up on the step-transaction doctrine. Even if you have the money, the IRS is not going to believe that you were legitimately selling your house for any reason other than to buy it back later for a higher cost basis, so they are going to reject your claimed cost basis.
    – chepner
    Commented Aug 11, 2021 at 20:23

1 Answer 1

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I closed as a duplicate. (It was re-opened by vote, as we often do here) The step transaction doctrine is key. Selling and buying back from a non-arms-length party is trying to game the system and would fail in an audit. Let's see what others say.

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  • Thanks for the legalese. It seems given time some of this is up for interpretation and there's "safer" ways to do it. This one discusses backdoor Roth and the IRS confirmed that "12 months is sufficient" kitces.com/blog/…
    – asdfasdfasfdhsadf
    Commented Aug 12, 2021 at 0:03
  • Who's to say you really didn't sell it to your brother who legitimately rented it for a year or two and then you decided to buy it back because he was tired of being a landlord. I think given enough time it becomes greyer and grayer. Especially with a good attorney on your side.
    – asdfasdfasfdhsadf
    Commented Aug 12, 2021 at 0:05
  • But I agree, it's best to plan some of this stuff with an attorney. Corporations do WAY worse in terms of tax avoidance.
    – asdfasdfasfdhsadf
    Commented Aug 12, 2021 at 0:06
  • All due respect, I know Michael Kitces. I have literally hugged him in person. And he is smarter that I’ll ever be. It’s a matter of surviving an audit, as are most tax questions. “I have no receipt from charity, only my cancelled check”. “Good luck if you are audited” something like that. (To close on Michael's article, it was written at a time of uncertainty about a specific issue, the BackDoor Roth. The IRS has confirmed there is no required wait time in that case. The article is fine, but outdated. I maintain this (your situation) is no different than same Step Transaction issue.
    – JTP - Apologise to Monica ♦
    Commented Aug 12, 2021 at 0:15

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