Reference no: EM132670666

Problem - Alternative Uses of Property

After 11 months, Alice has changed her mind about selling the house to her nephew. As a result of a recent groundbreaking for an upscale real estate development nearby, the appraised value of the house has increased to $600,000. Alice has decided that she needs to do something with the house other than let it remain vacant. She is considering the following options and has come to you for advice.

Sell the house for approximately $600,000 using the services of a real estate agent. The real estate commission rate is 5 percent, and her inherited basis is $475,000.

Convert the house to a vacation home (100 percent personal use by Alice and her family); then sell it in two years.

Convert the house to a vacation home (projected 40 percent rental use and 60 percent personal use); then sell it in two years.

Sell her current home and move into the inherited house. She has owned and lived in her current home for 15 years, and her realized gain on the sale would be about $200,000. Because she is nearing retirement, she would live in the inherited house for only the required period to ensure any tax benefits on its sale and then sell it.

Alice, who currently faces a 24 percent marginal tax rate, expects the inherited house to continue to appreciate in value by about 5 percent per year. She plans on retiring from her job in two years and moving to a warmer climate. Until then, she is neutral as to which house she lives in. What advice can you offer Alice?