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Sunday, May 19, 2002 - Page updated at 12:00 AM

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Home Forum / Elizabeth Rhodes

How to make rental property 'owner occupied' to avoid taxes

Q: I'm looking ahead to selling my rental property and wonder how to avoid paying capital-gains tax. If my son occupies my rental while he's in college and I'm supporting him, does this meet the test of being owner occupied? Alternately, if I move in after I retire, must I be in residence full-time or can I spend part of the year living in a rental elsewhere?

A: "Lots of people have fished for that — having a family member live there — but it won't get the job done," says enrolled agent Forrest Waters, owner of Forrest Waters Tax Service in Kent. "The law says the taxpayer has to make that (property) his principal residence."

However, you can be gone a good amount of time and still claim this property as your principal residence. The trick, Waters says, is to ensure the IRS considers this your home. You do that by creating a paper trail. "My advice is to make sure that's where your bank statements go. File your tax return from there. Have your driver's license there. That should work."

As long as you're looking ahead to retirement, don't overlook the tax-saving advantages of doing a 1031 like-kind exchange, Waters adds. Here's how it works:

Say you have a rental condo in Ballard. You eventually want to retire to the San Juans. So you locate a cabin there. Within the framework of a 1031, you sell the condo and buy the cabin, with the proviso that the cabin also be a rental property. Now you rent the cabin out for at least two years. Then you move in, and voilà, "you avoid capital gains on the whole bit."

Q: I'm a member of a minority group. An employee of my apartment building called me a derogatory name. I was having personal problems and wasn't able to move out then. When I did, I didn't give notice, but I did tell management about the incident. What are my rights as a result of this incident? Am I entitled to my deposit or some of my rent back?

A: Your situation is complex because it involves both the state's landlord-tenant act plus the various discrimination statutes. They're what a judge would use in deciding your case — however, neither exactly addresses your situation. That said, it may be possible to get some sort of monetary remedy, although it won't be easy.

First, attorney Joe Brown of Montgomery Purdue Blankinship & Austin, says landlord-tenant law requires you to give 20 days notice before vacating. If you don't, the landlord can keep your security deposit. As for the rent, "you don't get a rebate because someone called you a name, because that's not rent-related," he points out.

Otherwise, Brown says, you might try arguing in small-claims court that you're due a refund because you were "constructively evicted." The thinking here: The apartment employee created such a hostile atmosphere you had to leave, and therefore you deserve at least some money back. However, if months elapsed between the incident and your departure, chances of victory are dicey.

Roxanne Vierra, of the King County Office of Civil Rights, says discrimination law might give you recourse, including monetary damages. What's important here: whether your minority group is covered under these laws, what the offending employee said, and whether you can prove it. Assuming you're covered, Vierra says the derogatory name must be related to your minority status. "Just saying you're a lazy layabout won't do it."

If the employee called you a bad name in front of witnesses, or has a pattern of calling others like you bad names, your case is strengthened. Otherwise, chances of winning are slim, she says.

For more on this go to www.metrokc.gov/dias/ocre/fhlaws.htm. The deadline for filing a discrimination claim is generally six months from the time of the last incident.

Q: We have a six-foot fence around our entire property. Still, we've discovered intruders have been using our hot tub. We suspect they're residents of an apartment building overlooking our house. Do we have any legal grounds to get the apartment owners to erect their own fence, screening their apartments and their Dumpster from our view, as well as deterring people from entering our property?

A: "Anytime you have a single-family property next to a multifamily property there's potential for conflict," notes attorney Linda Youngs, with Bellevue's Hanson Baker Ludlow & Drumheller. As a homeowner, you have a chance to mitigate the bigger building's impact, but only during preconstruction when that building is getting permits. Some cities then will impose fencing or landscaping requirements, Youngs notes, but after the building is built, "there's nothing you can do."

Home Forum answers readers' real-estate questions. Send questions to Home Forum, Seattle Times, P.O. Box 1845, Seattle, WA 98111, or call 206-464-8510 to leave a question on a recorded line. The e-mail address is erhodes@seattletimes.com. Sorry, no personal replies. More columns at www.seattletimes.com/columnists.

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