I apologize for the length of this, but I'm a bit ignorant when it comes to taxes, truthfully.

    Some basic info, first:

    • I’ll be closing on a single-family, year-round waterfront cottage (1000sf) in November.
    • This is a cash purchase so there will be no mortgage ($ coming from the sale of my prior home a few years ago).
    • After the closing, this cottage will be the only real estate I own.
    • I am not married, nor will I be married.
    • My name will be the only one on the deed.
    • I currently live with my BF, in the home he owns.
    • I am not on the deed of his home.
    • The cottage I am buying is only 29 miles from my BFs home.
    • My BF solely pays the mortgage and maintenance on his home.

    I’m not dumping my BF, and I don’t want to completely move out – the plan is for us to use both properties.

    • My BF and I keep our finances separate, except for a joint checking account we fund and to pay shared expenses – utilities and groceries.
    • After closing on the cottage, we plan to pay for its utilities from this joint checking account, as well.
    • I will solely pay for the cottage’s taxes, maintenance, and updates.

    As residential waterfront property is a limited commodity, it tends to appreciate more than non-waterfront property – making paying capital taxes on it a concern, should it say, double in value in the next 15 years or so.

    I’m not planning to sell the cottage, however my understanding is that the property needs to be my legal primary residence, if I want to avoid or reduce capital gains tax I have to pay relative to the entire time I own it, should I sell it in the future. I also read that I have to sleep a majority of nights per year at the cottage, for it to qualify as my primary residence, for capital gains tax purposes.

    Because of this, I am wondering if I CAN make the cottage my legal permanent residence – that is, change my legal address from my BFs house – with the post office, voter registration, car insurance, credit cards companies, banks, and employer – to the address of the cottage I'm buying.

    I likely will also open a bank account in the cottage’s hometown, as well, and send it some direct deposited $ from my paychecks to pay for its taxes, maintenance, and updates. I do have a gym membership near my BF’s home, that I intend to continue to pay for/use.

    But truthfully, it’s hard to determine now if I’ll be sleeping at the cottage more than 50% of the time, which would be 183 nights. If I vacation there and spend most weekends there – I'd be sleeping in the cottage about 170 nights – pretty close to the 183 needed to qualify as the place I spend the majority of nights.

    So my questions:

    Is what I'm considering legal?

    Do I need to worry about whether or not I’m sleeping at the cottage the full 183 nights?

    Are there IRS red flags in this scenario, or anything else I should be worried about?  

    Has anyone else been in a similar scenario that worked great or didn't work out for you?

    Thank you for your patience, opinions and advice, in advance.  
    BM

    Concern for future capital gains taxes on cottage I'm about the purchase
    byu/blue-maitai intax



    Posted by blue-maitai

    3 Comments

    1. Its-a-write-off on

      From what you describe this would not be your primary home. You describe it as where you vacation to.

    2. Why are you worrying about this? If you are not planning to sell the cottage, as you say, then capital gains are a non-issue. If you do sell it and make a pile of money in LTCG, you will pay a maximum of 20% in Federal tax and keep 80% of the profit. You will also be able to reduce your basis by any improvements you make in it.

      The exclusion for your principal residence would be $250,000, saving you at most $50,000 in taxes. But since you have no plans to sell, that really doesn’t matter. And if you have a gain of more than $250,000 over and above the purchase price, you will walk away with a lot of money.

      That’s a good problem to have!

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