How can we avoid tax liability for selling a home we have rented?

August 21, 2008

From:  David
Date:  19 Apr 2008

We live in California and have a home in Washington State that we have rented since 2003. We have been told that we should not sell the Washington home due to the tax liability. We would need to live in the home two out of five years before we sell the home. To do that we would have to leave our California jobs and move back to Washington. How can we stop this vicious cycle?

We look forward to your response.

Answer

Date:  25 Apr 2008

Hello David,

Since you have been renting the home since 2003, it is investment property that qualifies for a tax-deferred exchange. How about exchanging it for another property that generates cash flow or better appreciation or is located closer to you? Consider exchanging for a tenant-in-common interest.

If you receive cash for selling the property, you aren’t going to be able to avoid income taxes. As California residents, you are subject to California tax on your worldwide income.

Good luck!
Mike Gray

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