real estate appreciation tax

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grayparrot
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real estate appreciation tax

Post by grayparrot »

My wife and I recently bought a duplex. Almost immediately, one tenant offered to purchase his unit as a TIC/condo interest. The proceeds would represent a significant portion of my total cost.

We intend to move into the second unit, expand it substantially, and reside there as our principal residence for a few years.

Is there an option to declare the proceeds we receive from the tenant as a return of capital, so that a subsequent sale of our remaining interest would be a) a long term gain and b) not taxable up to $500k in gain due to total personal residence exemption?

thanks for insights...
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Sandtrap
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Re: real estate appreciation tax

Post by Sandtrap »

Why not keep the property intact for now and keep renting the other half of the duplex?

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AnnetteLouisan
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Re: real estate appreciation tax

Post by AnnetteLouisan »

It’s odd that a renter would immediately ask to buy. Does it strike anyone else that way?
Gill
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Re: real estate appreciation tax

Post by Gill »

Are the two units able to be owned separately?
Gill
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adamthesmythe
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Re: real estate appreciation tax

Post by adamthesmythe »

Gill wrote: Thu Jan 13, 2022 8:36 pm Are the two units able to be owned separately?
Gill
A condo association (even with only two units) requires paperwork to define the units, provide for sharing of costs, have a procedure for governance...and maybe deal with some zoning issues.

I wouldn't expect it to be easy, fast, or cheap. OP probably needs to explore the procedures and hire a lawyer before working out the tax issues.
MarkNYC
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Re: real estate appreciation tax

Post by MarkNYC »

Assuming the answer to Gill's question is yes, the answer to your question is NO - the proceeds from the sale would not be treated as a return of capital. Instead you would have a capital gain from the sale.
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grayparrot
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Re: real estate appreciation tax

Post by grayparrot »

Sandtrap wrote: Thu Jan 13, 2022 8:03 pm Why not keep the property intact for now and keep renting the other half of the duplex?

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because in my HCOLA one does not receive a good rental yield...
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grayparrot
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Re: real estate appreciation tax

Post by grayparrot »

AnnetteLouisan wrote: Thu Jan 13, 2022 8:16 pm It’s odd that a renter would immediately ask to buy. Does it strike anyone else that way?
It is an odd situation. Rent control for this unit has resulted in a rent 75% below market. Therefore, I don't have a sound financial choice other than to evict the tenants and take the building off the rental market...or buy them out of their leases. The tenant in question likes the property and would prefer not to leave. I intend to triple the size of the other unit, and already have plenty of real estate exposure, so I'd rather take some off the table by selling off an excess unit, and using the proceeds to fund the buildout of the remaining one. Of course this is all based on the fact that i like the tenant and am motivated to find a way for him to stay, if it makes financial sense for me. His primary motivation is to maintain residence for the rest of his life. I don't want to be in the rental business. So, condo converting seems logical.
Last edited by grayparrot on Thu Jan 13, 2022 11:21 pm, edited 1 time in total.
Topic Author
grayparrot
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Re: real estate appreciation tax

Post by grayparrot »

Gill wrote: Thu Jan 13, 2022 8:36 pm Are the two units able to be owned separately?
Gill
We're in California. State law allows TIC (tenancy in common) interests that the cities can not interfere with. The city does regulate condo conversion, and though that process is not cheap and does take time after TIC conversion, the costs are exceeded by the increased value of the units. Per square feet value for nice small residences in my area start at $1000/sf.
soxfan10
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Re: real estate appreciation tax

Post by soxfan10 »

I wont comment on the ability to split as its beyond my ability, but no you cant claim full return of basis, basis would need to be split between the units and gain computed on the unit sold. If you were previously renting, this would have needed to be done in any event, to determine depreciation.
soxfan10
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Re: real estate appreciation tax

Post by soxfan10 »

MarkNYC wrote: Thu Jan 13, 2022 9:31 pm Assuming the answer to Gill's question is yes, the answer to your question is NO - the proceeds from the sale would not be treated as a return of capital. Instead you would have a capital gain from the sale.
This isnt quite right. The basis needs to be allocated between the two. If the basis allocated to the sold property is less than proceeds than that excess is gain.
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grayparrot
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Re: real estate appreciation tax

Post by grayparrot »

[/quote]

This isnt quite right. The basis needs to be allocated between the two. If the basis allocated to the sold property is less than proceeds than that excess is gain.
[/quote]

This is what I am Wondering if the units are of equivalent size is it mandatory to assign basis proportionally to each unit or is there any flexibility to assign a higher basis to one versus another
phxjcc
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Re: real estate appreciation tax

Post by phxjcc »

Sorry, but you are going to have to speak with a RE attorney about this.

There is a big problem if you cannot divide the property into two DEED -able properties.

I don’t see how a TIC situation could be done without untenable possible negative outcomes.
MarkNYC
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Re: real estate appreciation tax

Post by MarkNYC »

soxfan10 wrote: Fri Jan 14, 2022 12:05 am
MarkNYC wrote: Thu Jan 13, 2022 9:31 pm Assuming the answer to Gill's question is yes, the answer to your question is NO - the proceeds from the sale would not be treated as a return of capital. Instead you would have a capital gain from the sale.
This isnt quite right. The basis needs to be allocated between the two. If the basis allocated to the sold property is less than proceeds than that excess is gain.
Of course basis would need to be allocated. Since the OP stated that "the proceeds would represent a significant portion of my total cost" it seems almost certain to result in a capital gain after the basis allocation.
MarkNYC
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Re: real estate appreciation tax

Post by MarkNYC »

grayparrot wrote: Fri Jan 14, 2022 1:31 am
This is what I am Wondering if the units are of equivalent size is it mandatory to assign basis proportionally to each unit or is there any flexibility to assign a higher basis to one versus another
There would have to be some justification for an unequal basis allocation. If the two units are of equivalent size, how would you justify allocating more basis to one unit (the one you sold) than to the other unit (the one you kept)?
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ResearchMed
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Re: real estate appreciation tax

Post by ResearchMed »

grayparrot wrote: Thu Jan 13, 2022 11:18 pm
Gill wrote: Thu Jan 13, 2022 8:36 pm Are the two units able to be owned separately?
Gill
We're in California. State law allows TIC (tenancy in common) interests that the cities can not interfere with. The city does regulate condo conversion, and though that process is not cheap and does take time after TIC conversion, the costs are exceeded by the increased value of the units. Per square feet value for nice small residences in my area start at $1000/sf.
Do you know what price they have in mind?
If this is rent controlled, are there limits to what you could "charge" or even whether you'd be allowed to convert from a rental apartment? Even with a "happy renter-to-buyer", there might be a local interest in not selling off rental uints.

Separately, you "like the tenant".
What happens if (when?) they sell and there is someone right there who you perhaps don't like so much? As a separate unit, depending upon what kind of price they can arrange, in a tight housing market, *they* may want to get full market value for their new property.
Just keep in mind that situations can change.

Converting to condos... get a RE attorney who has experience with this.
(I did this with my first RE purchase, a 3 family. Fixed them up considerably. Living in one took them all off the rent control list back then. That meant we could get nice high rents, commensurate with the nice upgrades, etc. And a few years later, I changed them to condo ownership and sold all three. I was able to do this because they were no lonter rent controlled. One unit was a my residence, and the other two were investment properties. They had to be kept separate, while they were rentals and then when sold.)

RM
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Topic Author
grayparrot
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Re: real estate appreciation tax

Post by grayparrot »

[/quote]

Do you know what price they have in mind?
If this is rent controlled, are there limits to what you could "charge" or even whether you'd be allowed to convert from a rental apartment? Even with a "happy renter-to-buyer", there might be a local interest in not selling off rental uints.

Separately, you "like the tenant".
What happens if (when?) they sell and there is someone right there who you perhaps don't like so much? As a separate unit, depending upon what kind of price they can arrange, in a tight housing market, *they* may want to get full market value for their new property.
Just keep in mind that situations can change.

RM
[/quote]

good points. It is rent controlled but the tenants will either accept my buyout offer, or I will use state law (Ellis Act) to go out of the rental business with flat mandated payments to the tenants. After that, no re-rentals are allowed, nor condo conversions. However, TICs are still allowed, not uncommon where I live, and financeable.

I had planned to retain a right to match any legitimate offer to re-purchase the unit I may sell to the existing tenant.
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