1031 exchange house gifted my mother

My mother gifted me her primary residence in 2001 with no  exchange of any money.  I have never lived in the house during this time;  my mother has.  She moved out 7 months ago.  We are selling the house and  there is not much to claim for capital improvements.  The house was  purchased in 1963 for 25K.  It was worth about 485k when she gifted it to  me and it is selling for 705K.  Can you help?  Thanks

 

Dear M:  Your question is more complicated than you think.  1) Your basis (starting point for calculating gain) is a carried forward basis from your mother.  This is because she gifted it to you.  Her basis and therefore your basis is $25K.  2)  If you have held the property for investment since you received it as a gift in 2001, then you can sell it and 1031 exchange it into new investment property, and defer the tax liability.  3) The big question is:  Have you held it for investment?  The reason I ask that is that I presume that you allowed your Mother to live there for little or no rent.  That doesn't make it look like an investment.  4) You should take the position that you held the property for investment and then gifted to your Mother the value of the rent that anyone else would have paid to live in the house.  5) Because you have never lived in the house IRC section 121 does not apply. 6) If you do not do a 1031 exchange then you will be liable for tax on the full gain ($705K-$25k= $680K)   An estimate of the tax on the amount, state plus US is $136K.  This is a lot of tax and you should certainly consider a 1031 exchange.  I hope we can be of help.  Sincerely,

 

Steve Hickox
Attorney / President