Any guidance or help on this would be appreciated.

I have a tax delemma with selling two houses and not wanting to pay capital gains. House one is my house that I have owned for over 14 years. House two is the house that my fiance has lived in for about that same length of time. The problem is that she never had any ownership in it during that period of time because it was owned by the mother of her ex who she lived with but was not married to. As part of their splitting up (they have two kids together) They had a contract which allowed her to buy him out for essentially what was paid for the house in the beginning. This is where I come in. I bought him out last January. Both of our houses are worth subtantially more than what I paid for them.

The next problem is that my house is too small for all of us but in a reasonably nice area. Her(our) house is bigger and a potentially much nicer house (Victorian stained glass etc) but the next street over is nearly intolerable for me to live next to due to the fact the people there are by and large uncivilized particularly with respect to how they manage their dogs (incessant barking etc).

The ideal solution would be to sell both houses now but as I see it that I can't do that without incurring capital gains expenses on one of them. I afraid that two more years here in her house will put me into a state of irritrevable depression.
Quite honesty I would be happy here (at her house (it does have a nice brick three car garage)) if there were some way to control the nieghbors managing of their dogs. But when you are dealing with low class people that that seems highly unlikely.

Is there a legal path out?

Clearly, you can sell the house you currently live in with no capital gains taxes. There's a limit on the gain, but, presumably, you'll not exceed it.

But, the second house is strictly a house for investment purposes. Your basis in the house is the value that you paid to purchase it. If you sell it for more than the basis, you'll have to pay capital gain on the difference. I don't see any way around it.

The only possibility is to do an "exchange". This is not exactly what you think. What happens is that you find a house that you wish to purchase. Someone wishes to purchase your house. But, no funds change hands directly. Effectively the houses are exchanged in a three way deal where you never touch the money from your sale. Naturally, the house you buy must cost more than the house you are selling.

Do some investigation on "tax free exchanges" and see if you can get it to work for you. I've never done it, but, for a relatively small fee ($2K or so), the basis of the old house is transferred to the new house if it's done correctly.

Brian,

Thanks for feedback. Thats exactly the kind of input I was looking for. What is likely going to happen is I am going to sell my house (house number one)and gut it out in the her house for two years after that. Then I won't have to pay the capital gains on either.

I think that I will be spending a lot more time at work in the coming two years....

If you sell your primary residence of more than two years there is no capital gains tax. If it is an investment property you can look into a 1031 exchange.

Seriously, check out the exchange possibility. As Med mentioned, it's called a "section 1031" exchange and I do believe it will solve your problem without the need to kill two years of your life in a house that's undesirable.

http://en.wikipedia.org/wiki/1031_exchange

http://www.1031exchangemadesimple.com/1031-faq.html

Thanks Guys