No capital gains tax on home exchange?

DEAR BENNY: My husband and I built a townhouse in 1983 for $33,000. We lived there for a few years and then rented it out for 17 years, taking all the tax advantages such as depreciation, etc.

In 2003 we sold it for $90,000, and did a like-kind exchange with a house that my husband built. That house has been rented for the past six years and now has a market value of $190,000. We have no liens on the home and would like to sell it and put the money towards our dream home.

If we moved into the home and lived there for two years, would we have to pay capital gains taxes when we sell the home?

We've asked our certified public accountant (CPA) and she said we would have to pay capital gains because we took depreciation on the properties. We also asked a friend who worked for the Internal Revenue Service and he said as long as we lived in the home for at least two out of the last five years before we sold the home, we would not have to pay capital gains tax. Who is correct? --Jeanne

DEAR JEANNE: I believe your CPA is correct. Any depreciation that you took after May 6, 1997, will be taxed. And based on a new 2008 tax law, the gain must be allocated between the rental and the personal use starting after Dec. 31, 2008. The portion of the gain allocated to the rental period will be taxed.

I would always follow the advice of your paid accountant, rather than that of a friend, even if he or she works for the IRS.

DEAR BENNY: I live in New York and my 80-year-old mother lives in Florida. We are both on the deed to my home, which was purchased in 1994. She wants to give me the house outright, and wants her name off of the deed. What is the easiest way and how should we go about it? --Tom

DEAR TOM: The process of transferring title from your mother to you is easy; however, the tax complications may not be so easy.

You, and preferably an attorney, can make sure who owns the property by conducting a title search. If it is clear that you and your mother own the house, the lawyer can simply prepare a deed conveying the property from her to you. There may be some technicalities in New York that I don't know about. And, generally, because this is a transfer between mother and son, again -- depending on New York law -- you may not have to pay any recordation or transfer tax but only a nominal fee to record the deed.

But discuss the situation first with your lawyer and/or a tax advisor. My answer below may not apply in community property states out west, such as California or Oregon. ...CONTINUED

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