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This question applies to a property in Washington State in the the United States, although I'm curious how this might be handled on other regions.

I'd like to adjust the cost basis of my house prior to renting it so that it reflects the house's appreciation. Here are my motivations:

  1. many years down the road when I sell it, I'd avoid paying taxes on the appreciation.
  2. I'd like to benefit depreciating a larger asset.

Is there is a standard way to doing this?

It would be similar to selling the house today (utilizing the Capital Gains Exclusion) and then buying a house in the same neighborhood in order to rent out.

The property's mortgage could be paid off to make the transfer easier.

A story will highlight why I am asking this question:

I have a house in another state that I rent out. I had originally lived there, and when I moved the house was worth about $250k more than what I bought it for. I have been renting that house for 5+ years at this point. During those 5+ years the real estate market has been flat. If I were to sell that rental house today, I would be paying taxes on the $250k capital gain. If I could go back in time I would have sold the house instead of rent it, enjoyed the capital gain exemption, and then purchased a different house for about the same value. This would allow me to sell the house today and pay very little taxes

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    How do you sell your house to yourself? You are the same entity!!! – Victor Jan 10 '18 at 7:23
  • you probably would need to have some kind of business that you sell to. – Aganju Jan 10 '18 at 12:11
  • With other assets there is a thing called a 'wash sale' in which you are deemed, for tax purposes, to have sold the asset to yourself, thus triggering a tax liability. I don't know any reason this shouldn't work for a house. – DJClayworth Jan 10 '18 at 15:26
  • @DJClayworth I have never heard of wash sales described like that. I can't see how it would apply to OP's situation. The tax term I think would apply is "arms-length transaction," which selling a property to yourself would not be. (There's also the aspect that a wash sale never disallows gains, only losses.) – stannius Jan 10 '18 at 20:20
  • Regardless, it sees clear to me this is a "consult a tax advisor" situation. – stannius Jan 10 '18 at 20:21
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Let's say you paid $100k for the house. You sold it, to yourself, for $200k to "take advantage of the capital gains exclusion".

  1. You'll need at least to form an entity to sell it to.
  2. You'll need to come up with $200k to pay yourself, so that you'll have a gain of $100k.
  3. This seems problematic if there is a mortgage in place, because you'll have to refinance it or get the bank to assign the mortgage to the new entity.

There seems to me, to be ZERO point in doing this transaction, not to mention it sounds like trouble/headache.

However, what if, you the owner of the home, rented the house in 2018 to Entity You? Entity you has rent expense, you the owner has rental income that is now available to offset against the mortgage interest and property taxes, which are now limited by the tax law. In 2018 you take the Standard deduction and deduct these expenses fully against the rental income. Doing this for long, you'll lose the capital gains exemption. BUT, I think the lower capital gains tax rate would make it worth being able to claim these deductions. Hypothetically.

  • Does the tax law change how rental income and expenses are reported on Schedule E (or Schedule C depending on the entity created in step 1)? – user662852 Jan 10 '18 at 20:35
  • i'm a CPA but not a tax guy. I think there used to be rules about renting to yourself, & basically you couldn't deduct expenses, except a few things, 1 of those was interest. But, repairs & maintenance not deductible. Also, think the key in past was you weren't allowed to have a loss. My scenario, imagines renting the house "at cost" basically, so no loss, but take advantage of deducting interest AND getting the standard deduction. No idea if possible, but i get pissed that "the little guy" always gets an eye roll when he looks for a tax loop hole. They're in there, just have to find them. – wbkramit Jan 11 '18 at 17:02

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