After being passed from one tax attorney to the other, I finally decided to talk to a CPA that I was using a few years ago. Here is what she said:

You are on the right track with wanting to preserve the appreciation without incurring tax upon eventual sale. I encourage you to get the appraisal as planned, but you do not have to go to the effort and cost of selling the home to an S corp to retain the tax exclusion. Upon conversion to a rental property, the fair market value becomes the cost basis for the rental. Later upon sale of the rental property gain will be calculated as follows: Sale Proceeds LESS Closing Costs LESS Adjusted Cost (Appraised Value when converted to rental LESS annual depreciation expensed)

So there is my answer. She may be wrong, but if the IRS disagrees, the use of a professional insulates me from any claims of tax evasion. That’s why I pay a CPA $175 an hour to do my taxes.

So it looks like we will do a quitclaim to an LLC. That makes things easier than dealing with an S corp.

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Matthew W · March 1, 2023 at 12:05 pm

“Upon conversion to a rental property, the fair market value becomes the cost basis for the rental.”
So your tax liability in the future would be the gain in value after the rental conversion?

    Divemedic · March 1, 2023 at 2:15 pm

    Yes. The gain from purchase to conversion is waivable because we are changing our primary residence. The gain after conversion would be taxable.

Danny · March 1, 2023 at 4:49 pm

I have always had an aversion to incorporation. But I understand the effectiveness as it pertains to the legal morass. Incorporation is a reasonable way to shield your personal liability.

    Divemedic · March 1, 2023 at 5:06 pm

    By having each rental property owned by a different LLC, anyone who sues the owner of any one property will, at most, get the assets of that one LLC, shielding me and the other properties.

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