How I Saved Mr. Perfect Lots of Money

A tall slender man in his mid 50’s had scheduled an appointment with me on a March afternoon. Let’s call him Mr. Perfect Timing. Since he was there to get his income taxes prepared, he also wanted some Tax Advice, at a perfect time in his life. He informed me that he usually prepared his own tax return, but had a situation that needed some professional advice. He told me he was a homeowner for many years. He had rented his home to his Aunt, approximately 15 years earlier. The home was in need of major repairs, and he was planning on selling the home after the repairs were complete, because his Aunt had just passed away in March of that year.

Well, my hands started getting really sweaty, and I got really excited, because I knew that this was his Lucky day, because the information I was about to tell him, was going to save him huge amounts of money. If this man had waited to get advice, I would not have been able to save him so much money.

I began to inform him that he needed to start renovating immediately. Since the home was a rental, he was able to write off all home improvements. The law says, that as long as the home is on the market for rent, rental repairs are a deductible expense.

Then I proceeded to advise him that after the renovations were complete, he should move into the home, homestead it, and live for at least 2 years. The law says, in order to avoid any capital gains on a home you must live in the home for at least two of the last five years. Since the home had been a rental for many years, he would have had to pay back all the depreciation that was allowed each year, whether or not it was actually claimed. This means that his cost basis in the home was very low because essentially he had been paid back for nearly half of the original cost of the home.

So, you see, he was able to completely renovate the home, as well as deduct the expenses for the next couple of years, and then sell the home and not have to pay any taxes on the gain of the sale. I am not sure exactly how much the total dollar amount ended up being, although, I am sure he was very grateful. Although I never saw Mr. Perfect Timing after that day, I often think of him.

The moral of the story is: If you have a question about your taxes, Ask it! You will never know how much money you can save unless you do. For help click here.