From: shannon@sierra.com (Shannon Maher)
Newsgroups: misc.invest.real-estate,misc.taxes
Subject: Question on capital gains: rental house was primary residence
Summary: Help!!
Keywords: capital gains, taxes
Date: 27 Aug 92 21:40:02 GMT
Distribution: usa
Organization: Sierra Geophysics Inc.,  Kirkland, Wa


   Are there any tax/real estate gurus out there who can help
illuminate how the US gummint will handle the following case?

  The facts (just the fax, ma'am) are:

  I sold my primary residence in Dec. of '89.  I owned this house
as a single person.  My girlfriend (became wife later, in 1990) and 
I bought a house at the same time: joint ownership of the new house.  
 
  In my 1989 taxes, I filed the form to allow me to defer the capital 
gains on the house I sold.  I now realize that my percentage of the  
new house did NOT qualify for the deferral - that is, my ownership of the
new house (50%) time the worth of the new house was NOT greater than the
sales price of the old house.

  We have occupied the new house for 2 3/4 years; we have since
had a child and may have another, so we need more space and a somewhat
different living environment.  Therefore, we have just finished the
purchase agreement on a new house, which we intend to close on in Sept.  

  Our current house has gone up very little in value, in spite of the
fact that we have put a lot into it, because of general housing 
prices.  (If this is news to you, you probably can't answer my 
questions :) :)).  Therefore, I am trying to determine if it makes sense
to rent it and wait (hope?) for the housing market to get stronger.
The house's location is perfect for rental, and we can handle a little
negative cash flow.

  Here are the taxing questions: a) Did I screw up by deferring the 
capital gain on the first sale, since I went from sole ownership to 
joint ownership, and my cost basis in the new house was not large 
enough?  Are agents of the US Gummint going to come put my butt in a
sling?

  b).  Does the fact we got married in 1990 change the answer to a)?

  c). If we keep our current house for rental for greater than 2 years 
after the purchase of a new house in Sept.  (the maximum time span
for deferrall of capital gains), does that make the previously deferred 
capital gains on the first house due?  

  d). If we wait, say, 5 years to sell our current residence, in 
which case it will have been a rental house for five years, what 
will be our cost basis in this house (the original cost plus
improvements)?  

  e). Is there any way we can "sell" or otherwise tranfer ownership
of our current house to ourselves, for the purpose of making it a rental?

  I know this stuff is somewhat out of the ordinary, but... Inquiring
minds want to know!  Thanks in advance.  Reply by email; if anyone
else has intersset in the answers, let me know - this is probably not
a "general consumption" topic.


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                   My opinions are my own, except, of course, in the cases 
                   where they are borrowed from far more intelligent people.
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Shannon Maher              "Visualize Whirled Peas" - Sign on reader board, on 
shannon@sierra.com                            Beautiful Lake City Way, Seattle