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Tax question with too big of heart

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  • Tax question with too big of heart

    I recently moved to a new state and bought a house. House in previous state was "sold" to friend on soccer field for sale by owner. We had a regular contract with money in escrow. Sale was contingent on his selling his house. His house flooded so it didn't sell right away so we amended the contract. He and his family had no place to live so we let him move into the house since we were moving out of state. House is still on contract. He added additional money to escrow. He was renting month to month. He lost his job and couldn't get a mortgage but had sold his house. We amended the sales contract for another 6 months. He is renting the house until then with the intent to buy the house eventually. Now my tax preparer person is telling me that this house is not a rental property because my intent was not to make a profit (the rent doesn't cover the mortgage and there were many things we fixed prior to leaving the house to get it ready for sale/rent). She is also telling me that when I sell the house since it is not a rental property I will not have to pay gains. Thoughts? True? She is saying this is "not for profit" which must means something different to her than me!

    Edit for clarification: Not rent to own.

  • #2
    How far below market value? This sounds like arm's length but with a discount because you feel sorry for the family (heck, I even feel sorry for them). This is different from a situation where you "rent" a $3,500/mo house to your kid for $1,000/mo. There is definitely a gift intent in the family situation.

    I tend to disagree with your preparer, but no way to know without amounts. And I definitely wouldn't call it "not for profit" (is there a bit of judgment being made?) You were intending to make the best of a bad situation and trying to get what income you could out of it. You will still be able to exclude the gain if you sell within 3 years of your move under the 2 out of 5 year but you will have to recapture depreciation, which shouldn't be a big deal.

    Still trying to figure out where the soccer field comes in...
    My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
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