Avoiding Capital Gains Tax While Renting Out Your House

by on March 22, 2012Jason Van Steenwyk

how to avoid capital gains tax when renting out your houseFirst, the bad news. The IRS levies a capital gains tax of up to 15 percent, depending on your tax bracket, on the profitable sale of investment property. Furthermore, investment property does not normally qualify for the capital gains tax exclusion on up to $250,000 in capital gains ($500,000 for married couples filing jointly) that personal residences typically enjoy.

That exclusion’s worth a pretty good chunk of change. Assuming the top long-term capital gains rate of 15 percent, that adds up to as much as $37,500 for single owners, and double that for married couples. That’s enough to warrant doing some tax planning to mitigate the tax hit. You may not be able to avoid it altogether, but you may be able to take the edge off of the bill.

Know the Capital Gains Tax Rules

The good news is that once you rent a property out, it is not forever doomed to be treated like an investment property, subject to capital gains taxes on the first dollar. You can convert a property’s status from an investment property to a personal residence by satisfying the IRS’s simple use test: To claim the exemption, you must have lived in the property for at least two years out of the preceding five.

The simplest way to avoid the capital gains tax, then, is to live in the home for at least two of the five years immediately preceding the sale.

Use Section 1031 Exchange

The “landed gentry” has occupied a place in Congress since the dawn of the Republic. It’s not surprising, then, that they would write a landlord-friendly provision or two into the tax code. In fact, Congress has given real estate investors a gift not normally available to retail investors in stocks, bonds and mutual funds: a deferral of capital gains tax on exchanges of one property of “like kind” for another. For example, you can sell a residential rental property and buy a new one in exchange, under Section 1031.

To qualify, the property you’re selling and the property you’re buying must be of “like kind.” They don’t have to be identical – they just have to be in the U.S., and serving approximately the same function in your overall portfolio. Generally, you can exchange U.S. real property for another U.S. real property and defer capital gains tax under section 1031.

What Qualifies for Capital Gains Tax Deferral Under Section 1031?

There are some special rules that apply. The two properties don’t have to change hands at the same time, as would be the case with a direct swap, says the IRS. Instead, with a deferred exchange, “the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property.”

Additionally, you can’t defer capital gains in a personal residence under Section 1031. Both of the properties must be business or investment properties. Vacation homes don’t count. This provision only defers capital gains on one property. Your tax basis in the old property transfers to the new one.

Careful – Section 1031 only applies to the property itself. If you own the property within partnership, you cannot sell your interest in the partnership to avoid capital gains tax.

How Long Do I Have to Execute a 1031 Deferred Like-Kind Exchange?

There are two time limits you need to worry about: You have to identify your new property, in writing, within 45 days of selling the old one. You also have to deliver your identifying document to an intermediary whose function is to ensure that the 1031 exchanges are actually realized. “Notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient,” warns the Internal Revenue Service.

Second, you have only 180 days after the sale to complete the acquisition of the new property, or until the due date of your income tax return, including all extensions. If you blow either deadline, plan on paying the entire capital gains tax. The IRS does not grant waivers to these timelines, except for presidentially-declared disasters.

For more information on like-kind exchanges under Section 1031, see IRS Publication 544.

4 Ways to Prevent Rental Fraud

Sell a Loser

If you have investment property to sell at a profit, potentially generating a capital gains tax liability, look to see if you have any investments that have lost money. If you do, you may be able to offset some or all of your capital gains tax, using a technique called “tax loss harvesting.” The IRS aggregates all your gains and losses for the year. So selling losers can help you lower your capital gains tax bill. Furthermore, if you have excess losses, you can deduct up to $3,000 from your income, and carry this loss forward every year, deducting your loss against any capital gains, and then up to $3,000 of ordinary income, until your losses are exhausted.

Time the Sale

If you must pay the capital gains tax, consider doing so when your income is low. Why? Because your capital gains tax is a function of your income tax bracket. The lower your taxable income, the lower your long-term capital gains tax is likely to be.

For that reason, the best time to sell a property you’ve been renting is when your net taxable income, after deductions, is abnormally low. Try to bunch deductions in the same year, and shift income out of the year.

Use a Deferred Sales Trust

If you are unable to find a suitable like-kind property, or execute the transaction in time to qualify under Section 1031, or you simply want to get out of real estate, you may consider establishing a deferred sales trust (DST). The buyer funds an annuity held within the trust. The trust sends the income stream to you, according to a schedule that suits your income needs. This allows you to defer capital gains tax by taking your sales proceeds in the form of installment payments, in what the IRS deems a “structured sale” under IRC Section 453. You only pay the capital gains tax gradually, as you receive the payments from the trust.

Enlist!

Five years not enough? Join the military! If you are on active duty, and you are called away from your home on orders from Uncle Sam, you can “stop the clock” on the IRS’s use test for up to 10 years. Short of that 10-year limit, the IRS does not penalize members of the military for being called away from their homes of record on military orders. However, if this provision applies, you must still have lived in the property for at least two years of the previous 10 years to qualify. However, you cannot use this provision more than once every two years.

{ 159 comments… read them below or add one }

Lianna M. February 16, 2015 at 11:53 am

I want to sell my multi family property. Paid 210,000 and property has doubled its value in recent year . I have occupied main unit for the four years I have owned it,but my basement rental has been empty for at least two of the 4 years I have owned it. Would I be subject to capital gains. If so how is it calculated. Main living area I occupy is 1450 sq feet, rental 750 sq. Is it 50/50 or does sq footage come into play in determining what I will pay capital gains on. Any info will be helpful.

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Barbara February 12, 2015 at 1:32 pm

I sold my half-interest in a condo in Colorado to my son in October that has been a rental property since 2011. If he sells the property and buys another home within 180 days of the sale would that satisfy the criteria regarding deferral of the capital gains tax? Would he have to carry a mortgage on the new property?

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Nicole February 11, 2015 at 10:26 am

Hi, thank you for your informative post. I read through all the comments and replies and still have an unanswered question, though. Maybe you can share your thlights on this?
July 2012 – Bought new home in Las Vegas and moved in as main home.
October 2013 – husband took temporary 2 year position within the company he’s worked for for years in CA, food and housing paid for, idea being he would travel back home on the days he doesn’t work (4 hour drive). I don’t work, and we homeschool kids, so we often tagged along to be with him in CA.
March 2014 – We ended up staying in CA most of the time, and decided to rent out our house. Rental agreement started March 1.
* during this time we did change our address to CA but not our voter registration or drivers license.
Now, more than a year into temporary time, the position is looking to be permanent. We are going to sell the house in Las Vegas since tenant agreement is almost up. (We use a prop mgmt co).
Additional info: original mortgage amount was 163k. With permanent improvements we calculate our cost basis around $205k (landscaping, appliances, flooring etc) but does not take into account seller expenses) We are going to list for $215k but a similar house on our street sold for 205k last week. Side note: we do not plan on depreciating for the time it was a rental on 2014 taxes so that we can use the depreciation on the sale if need be.
My main question is how does a professional see our capital gains tax exemption eligibility status? We owned the home the entire time, but was it our main home from March 2013-now? I kind of don’t think so. How do I find out? And then, how do I calculate the “non-use” time? Ack! Thank you for any advice or suggestions!!

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Karrey Kay February 11, 2015 at 9:30 am

Hi Jeanette,
Thank you for your response. I found an article on irs site indicating another way of calculating sell of a rental (when it was first your primary home) It states the basis begins on the day the property changed from primary to rental at FMV. With that said. In 2006 property FMV was $475k. now it’s worth $380k. That would give me a loss not a gain. Original price in 1994 $144k. New loan is $350k since 2006. Are you familiar with this IRS rule? Thank you
Karrey Kay

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Alex February 7, 2015 at 12:00 pm

My husband and I have a property that we have rented out for the past 6 years. If we were to make a profit on the sale of the property can we put the money into our current primary residence to pay down the mortgage to avoid paying capital gains tax?

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Jeannette February 10, 2015 at 5:36 pm

Hi Alex,

In a word, No.

Have a nice day.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Linda February 6, 2015 at 8:51 pm

I have a condo that was used as a rental for most of the years that i have owned it (27 yrs). About 3 years ago I let my daughter move in and she pays the mortgage and HOA dues. She will be moving out soon and I am anticipating moving in for two years to convert it to a primary residence and avoid capital gains. My plan was to live in it for two years.
My question is whether the time my daughter and her family lived in this condo can be counted towards this two year rule to avoid capital gains tax?
I have not used this residence as a business expense for at least 5 years prior to her moving into it as it did not yield any savings.

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Jeannette February 10, 2015 at 5:43 pm

Greetings Linda,

No, you can’t. It has to be you, the owner, and/or your spouse to qualify for the ownership and use tests.

Regards.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Kathy February 6, 2015 at 5:11 am

We own a double and have lived in one side for 20 years. We are thinking of moving to another state.
If we purchase a similar property we will not pay capital gains?
If we choose to buy a single home, we will pay capital gains on one half of the profit made from our double?
And if we chose not to rent out half of our double for the next two years we could consider it as a single and have no capital gains upon purchasing a single home?
I tried to read as many previous comments as possible to answer these questions and am hoping I have it correct.
Thank you

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Jeannette February 10, 2015 at 5:59 pm

Hi Kathy,

You can’t use a Section 1031 Exchange to dispose of or purchase a primary residence so I don’t think question one will work in your case. If you sell the duplex and purchase a single family home with the proceeds, then yes, only half of the income from the sale is considered when calculating the capital gain on the rental property.

If you choose not to have a tenant rent the other side of the duplex that doesn’t mean it’s no longer rental property. You’ve already established that the structure is two separate units. I believe you would have to convert the structure to a single family home and occupy the whole thing in order for it to be considered a primary residence and be eligible for capital gains tax exclusion.

I suggest you visit with a qualified tax accountant in your area to discuss these issues further. Good luck.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Jeremy February 5, 2015 at 3:10 pm

This is a great article. I have a question.

I purchased a home in January of 2008 as a primary residence for $450,000. I lived in said home through August of 2013 (5 years and 8 months) and then moved and rented it out as of September 1 2013. Can you please confirm the following:

I understand that if I sell the home by August 31st of 2016, I will not owe capital gains on the home, as I meet the 2 out of 5 rule. I understand the notion of the depreciation recapture and that I will owe taxes on that regardless.

Can you please answer the following questions:

1. What if I move back into the home on September 1st of 2015 (after it had been a rental for two years and owner occupied for 3 of the last five years) , and then sell the home one year later. I will have met the 2 out of 5 rule, but as I understand it, I can only exempt non-qualified use after the last time I used the home as the primary residence. Does this mean that I would have to pay capital gains on the two years that it was a rental?

2. What if I move back into the home on September 1, 2016, basically right when the 2 out of 5 rule would have expired. I then wait 6 months and sell the home. Is it the same scenario as in number 1?

3. Is there any way that if one moves back into a home that was initially used as a primary residence, then used as a rental, and then used as a primary residence, they can exclude the full $250,000, or does that scenario simply not exist?

Thanks!

Jeremy

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Jessica February 2, 2015 at 5:21 pm

Hi,

My husband and I purchased our first home together in November 2005, we lived in the house until June 2010, when we moved overseas on military orders. We rented the house from July 2010-July 2013, then lived in the house again until December 2013. We live in a new house we bought and have been renting out the first home since Feb 2014. If we sell the house this year, can we avoid the capital gains tax with the “stop the clock” exception?

Any guidance would be greatly appreciated.

Thanks,

Jessica

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Jeannette February 9, 2015 at 11:03 am

Hi Jessica,

The answer is both yes and no. First, yes, you can use the “stop the clock” caveat in determining the five year period that determines the use test eligibility. However, because you are currently renting the house and not living in it, you will not be able to avoid capital gains tax.

You should be able to exclude some amount of the gain from taxation but it will be limited by the period of “non-use” which is the time that you have been renting the home. I suggest you consult IRS Publication 523 for further information then work with a qualified tax accountant when it’s time to file your 2015 tax return. Thank you both for your service and good luck.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Karrey Kay February 1, 2015 at 10:02 am

Hi,
I purchased a condo in 1994 $144k. Got married in 2005, took cash out for down payment on another condo. New loan is $350k. Couldn’t sell it so we’ve been renting it since 2006. At the time the appraised value was $475k which is the cost basis when it became a rental. Property is worth $380k we still owe $350k. Do we start our cost basis from purchase price of $144k or $475 when it became a rental. To figure if we’ll owe capital gains. Thank you Karrey Kay

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Jeannette February 9, 2015 at 10:17 am

Hello again,

According to the IRS, when you convert a home you used for personal use to rental use, the basis is determined by the lesser of the fair market value or the adjusted basis on the date of conversion (doesn’t seem fair does it). For example:

You bought the condo for $144,000. Let’s say you added improvements of $20,000 from the time you bought it until 2006 when you began renting it. Your adjusted basis at that time would be $164,000. If the fair market value (not appraised value) of the condo was in fact $475,000, your basis for determining gain or loss at the time of sale would be $164,000. If you made no improvements to the condo, your basis would be $144,000.

So, in the scenario you describe above, this rule works in your favor at this time because the value of the condo has decreased from what it was in 2006.

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Karrey Kay January 29, 2015 at 11:03 am

Hi,
I bought a condo in 1994 $144k. Got married in 2005. Took $120k equity(loan is $350 interest only, ouch) out for down payment on a condo. Its been a rental since. The value is $385k, ouch. Ignorant about interest only loans. Can’t refi, ltv isn’t enough. Loan going to balloon in 2016 to fixed rate 6.375 increase $775. per month, big ouch. Can I sell to a cash buyer, for what I owe $350k and negotiate the market value $385 ($35k) towards capital gain in a trust or something? From Oct 2014 to now Jan 2015 have we made little over the monthly interest only payment. So we’ve used it to pay the hoa. I feel ashamed for not understanding the laws before I took money out. In hindsight I would’ve sold when I got married. Market crashed the value went down to $180k ouch. Appreciate your help. Blessings Karrey Kay

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Jeannette January 30, 2015 at 3:00 pm

Greetings Karrey Kay,

I’m sorry, but I don’t understand your question. However, maybe the following will help: the IRS doesn’t care about market value when calculating capital gain on the sale of a rental property. Your taxable gain will be calculated as follows:

Selling price – selling expenses – adjusted basis of the home = gain

If the market value of the condo is $385,000 and you can sell it for that amount (which becomes the basis of your gain calculation), pay off your debt and still have money left over, I would suggest that you put a portion of that money into a special savings account so that you can pay your tax bill next year. If you sell the condo for $350,000, your basis for gain calculation will be less but it sounds like you won’t have any cash left over.

The other option you could consider in an effort to defer any capital gains until a future period would be to do a 1031 exchange. I suggest you consult a qualified tax accountant in your area to help you with this issue. Good luck.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Lori January 28, 2015 at 12:12 pm

I purchased my home in September 2004 for $106,600 and installed a $5000 irrigation system a year later. The market value is now 147,000. The home was my primary residence until I deployed to Afghanistan as an military civilian (non military)in February 2009. From March 2009 until now, the property has been a rental, minus a couple months when it was empty. When I returned stateside in December 2010, I continued to lease out the property. I have been living in another rental elsewhere. To date, I have owned the home approximately 10 years, 4 months. By the time I get around selling it, it will likely be 11 full years. Will I be responsible for 100 percent of the capital gain or for just the years it was a rental if I do not move back into it? Will I be able to deduct the cost of the irrigation system from the taxable amount? My current salary is $47,000, so I suspect my tax rate is around 27 percent. Confused.

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Jeannette January 28, 2015 at 5:48 pm

Hi Lori,

The first thing that concerns me is you use the term “military civilian (non military).” So it doesn’t sound as though you were a member of the uniformed services as defined by the IRS code so you wouldn’t be able to “stop the clock” on the use test. However, that doesn’t really matter because even if you could, you haven’t lived in the house for at least two of the required five years. You will most likely not qualify for the capital gains tax exclusion and will be required to pay tax on 100% of your capital gain.

The installation of the irrigation system would qualify as an improvement that will increase your basis in the house. It’s not “deducted from the taxable amount” but it is included in the calculation of gain on sale so will reduce the amount of your taxable gain. You can review several of the other responses below to see how gain is calculated.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Brandon Miller January 28, 2015 at 10:13 am

My wife and I bought our home in June 2006, we moved out November 2008 and rented our house from December 2008 – January 2014. During the rental period, we benefited from a rental depreciation on our taxes. We have since moved back into the home in February 2014 and are contemplating selling our home. Should we plan to live in the home for 2 full years before selling to benefit from a capital gains tax exclusion? Are we able to exclude all capital gains, or is the depreciation value claimed on our taxes going to be factored in to our purchase cost (reducing the cost) no matter what; ultimately triggering capital gains on that portion? We bought our house for $136,500 and is roughly worth $145k. Thanks!

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Nancy January 26, 2015 at 9:49 am

My father passed away last June. The trust includes a paid off home that we (3) adult children are deciding whether to rent or sell. If we sell now we are only responsible for capital gains on the increased of value since my dad’s date of death. If we decide to rent it out does that immediately turn it into rental property? Will we each then have to do a 1031 to not pay capital gains on the whole amount when we do sell it? I think we do but my siblings think the 2 out of 5 year rule applies. I don’t see how since none of us have lived there since we we kids.

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Jeannette January 26, 2015 at 1:39 pm

Hello Nancy,

If you decide to rent the property, then yes, it immediately becomes a rental property. The trust would then receive the income and disperse it per the terms of the trust documents.

A 1031 refers to a Section 1031 Like Kind Exchange. That’s not exactly the same as selling the property outright. It refers to selling one property and obtaining another one of the same type (in this case a rental property) within a specific amount of time. This type of transaction only defers the payment of capital gains tax, it doesn’t avoid it. And since there’s only one house, there can only be one exchange.

The 2 out of five year rule refers to the IRSs ownership and use tests that allow for exclusion of capital gains tax when you sell a home outright. I don’t think the trust can qualify for this exclusion. I suggest you consult a qualified tax accountant in your area so that you fully understand your options.

Good luck.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Sam Williams January 20, 2015 at 9:46 am

Hi,
About 7 years ago my now husband moved in with me and rented out his home located in Maryland, which is now a secondary home to him since we have since built a new home in Maryland. He is looking into selling his secondary home that he hasn’t lived in for more than 7 years for a profit of about 40k. We were wondering if he could roll that profit into a Maryland 529 plan for our son as a lump sum payment to avoid capital gains? Any advice would be greatly appreciated.

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Jeannette January 26, 2015 at 2:53 pm

Hello,

Probably not because capital gains tax is an IRS (federal) tax and the Maryland 529 plan is a state savings plan. I suggest you call a local tax account there in Maryland to find out more.

Best Regards.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Matt January 15, 2015 at 10:56 pm

Hello, thank you for the very informative article. I was wondering if you could shed some light on my situation. I bought a condo for $390k back in March of 2009 as a primary residence. In June of 2013 I moved out of the condo but found renters. Now it is 2015 and I am ready to sell (around June to August). The property has been appraised for $460k, but I may be able to get more. There is around $140k left on the mortgage. My question is, will I incur the a capital gains tax? I’m asking because out of the five years prior to selling the condo (say, June 2015), I did live in it as my primary residence for three of it. Secondly, were I to incur a capital gains tax, how much should I be expecting? (I’m in the upper 28% tax bracket) Thank you for any advice you can give.

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Linda Johns January 24, 2015 at 5:08 pm

We bought our house is 2000 at $220,000 and lived there until 2 1/2 years ago when we bought new house and moved but we held on to our old one and have been renting it. Is it correct that if we don’t sell it by the 3 year mark that we have to pay capital gain? Is that 15% and is that on the original purchase price or on the new value if we decide to sell which is now $450,000. We make a profit of a few hundred a month on our old house and not sure if it’s worth selling now to avoid the taxes or just keep renting to pay off the $140,000 mortgage left?

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Jeannette January 26, 2015 at 4:52 pm

Greetings Linda,

You must have lived in the house for at least two of the preceding five years ending on the date of sale in order to qualify for the capital gains tax exclusion. So yes, if it gets to be more than 36 months since you last lived in the house, then you will most likely be subject to capital gains tax at the long term rate then if effect; which right now, in most cases, is no higher than 15% but can be as low as 0%.

Capital gains tax is paid on the amount of gain realized on the sale of the house. Gain is calculated as follows:

Selling price – selling expenses – adjusted basis = gain or loss

The decision to sell now or rent should be based on your entire tax picture. I suggest you consult a qualified tax accountant in your area. Good luck.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Jeannette January 26, 2015 at 4:38 pm

Hi Matt,

Based on the timeline you provided above, I would say that you will be able to qualify for the capital gains tax exclusion. However, thanks to changes in the tax code sometime in 1996/97, you cannot exclude the part of the gain equal to the depreciation you claimed or could have claimed for renting the house. It’s called “unrecaptured section 1250 gain.” You may want to refer to IRS Publication 523 for further details.

As for how much you might have to pay; it’s hard to say. Calculating tax owed requires much more information. But it may very well be in the neighborhood of 25%. I suggest you seek the help of a qualified tax accountant in your area.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Becky January 11, 2015 at 2:54 pm

Hi, back in 2007 my husband got a new job in VA (we were living in UT at the time). We immediately put our home up for sale. Due to the economy/housing crash of 2007 we were unable to sell our home after 10 weeks on the market. We had lowered the price $10k each week, and when that $100k lower price was offered and we still had no offers, we decided to rent it out so we wouldn’t be paying two mortgages. The amount of rent we received never quite covered the mortgage, however. Fast forward 7 years and the renters finally decided they wanted to buy the house, so we sold it. Now of course we are subject to capital gains. My husband bought the house in 1991 for $91,000 and selling in 2014 at $247,000 because of appreciation is yielding a large capital gain tax. My question is, are there any exemptions surrounding the housing market crash? Our first choice was to sell, not rent. We also lost money on the mortgage ech month as I mentioned since rental rate didn’t cover monthly mortgage. Are we stuck with this large tax that will quite frankly, break us?

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Charles Miller January 14, 2015 at 10:44 am

Becky – I don’t see how this sale will break you??? You will be realizing over 150K in appreciation. Having to rent that home was a blessing in disguise – it appreciated WAY more than most others did…most lost value and are just now recovering some, but not all their pre-bust values. Take some of your proceeds, pay the taxes and thank your lucky stars you held onto the home and made such a profit. (btw – your tenants paid down your mortgage some each month too and your taxes and insurance and mortgage interest all helped to lower your tax bill so again – you have made out quite well financially vs had you been able to sell)

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Jeannette January 16, 2015 at 4:53 pm

Hi Becky,

With all due respect to Charles, may I add that to my knowledge, there are no tax exemptions or exceptions having to do with the housing market crash. However, don’t automatically assume that you’re going to be taxed on a gain of $156,000.

Your gain on the sale is calculated as follows:

Selling price – selling expenses – adjusted basis = gain or loss

So first off, you get to subtract any commission, legal fees, advertising fees, etc. that you may have incurred in order to sell the house. Second, if you made certain improvements to the house while you owned it, you can add those amounts to the beginning basis to determine your adjusted basis. Thirdly, there is a special depreciation “recapture rule” that may allow you to report some of the gain as ordinary income and not capital gain.

Hopefully you set aside some of the proceeds from the sale in anticipation of having to pay tax. I strongly suggest you consult a qualified tax accountant in your area to assist you with your tax return.

Good luck.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Ashley January 10, 2015 at 8:02 am

Hello,

My husband and I sold a home may 2012 and used the no tax exclusion and we sold another home that we lived in for 2 years and owned for a little over two years October 2014. Can I use the tax exemption again since its been a little over 2 years

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Jeannette January 16, 2015 at 4:25 pm

Greetings Ashley,

If you did in fact own and live in the second home for at least two years, then yes, you would qualify to take the exclusion again. The IRS rule says you can exclude gain if during the two year period ending on the date of the sale you did not exclude gain from the sale of another home. You can consult a qualified tax account in your area or IRS Publication 523 for further details.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Adam January 5, 2015 at 8:14 am

I bought a home in 2007, lived in it for 5 years, then got married. My wife and i bought another home (not primary residence), and have rented the other one for almost two years. I am thinking about selling it this summer. Will I have to pay capital gains?

Thank you,

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Jeannette January 9, 2015 at 5:10 pm

Hi Adam,

I’m sorry but your question is unclear. Are you going to sell house 1 or house 2? Which house have you been living in most recently? You can avoid paying capital gains tax only on a house that you have lived in for at least two of the last five years (any two will do) ending on the date of sale. So I suggest you draw a time line and then do the math to calculate if you meet the criteria.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Dorothy January 4, 2015 at 3:52 pm

So we are a military family and own just one house that we lived in before we began transferring to other locations. We will probably retire without living in it for the 2 years within the 10 required for military. Can we “exchange” that house for another house in the area we wish to retire. We would use the new house as our own residence. Secondly, does the new house have to be the same value or can it be higher or lower in price. Thank you.

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Jeannette January 9, 2015 at 5:32 pm

Hello Dorothy,

Yes, you can do a 1031 exchange for a house in a different neighborhood, or city or even state. However, a like-kind exchange only applies to business or investment property. You cannot use this type of transaction to acquire a primary residence. If you’re currently renting out the house you own and you would be able to rent out the replacement property for a time, then you might be able to benefit from a 1031 exchange. You should consult with a qualified tax advisor in your area to discuss your timeline and what happens when you convert a rental property to a primary residence.

Regarding the value, there is no requirement that the new property be of the same value as the property given up. However, if you receive money back as part of the exchange, then you would be required to recognize gain to the extent of the money received, and pay tax on it.

Good luck, I hope you can make it work for you.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Cathy January 3, 2015 at 9:35 pm

My parents sold their home in the 1990s in PA and moved to NC and rented a home for a yr then bought their new home for approx 180,000. and are currently residing there. They tell me they were able to avoid cap. gains tax for that sale, a one time deal(?). Now they are in their elder yrs and I want to relocate them closer to us in another state due to medical concerns/age. We are exploring their options. The home now appraises for 280,000 and I know they have done work to the home over the past 24 yrs.
So does the replacement of roofs, heating systems and vapor barriers get deducted from profit?
Do they have to pay Tax no matter what their age is?
What if they want to go into a continuing care facility that has a buy in of 300.000? do these facilities even count as a purchase of a home? and if so what happens when they die and money is returned to the estate?
What if they buy a new home? is it wise to have a child or children name on the deed? What happens if they die after just a yr or two, is the home then deeded to the children or child? or does it go back to the estate?
I appreciate all your help that you can give just to give me guideline.

please respond to my email address.
Thank you so much!!!
Cathy

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Jeannette January 9, 2015 at 5:57 pm

Cathy,

I’m sorry but I can’t see your email address in this forum. I’ll have to post my reply here.

You’ve got an awful lot of questions in that one paragraph so I’ll do my best to address them.

1. The capital gains tax exclusion is not a “one time” deal. But you can only use it once every two years.
2. Nothing is deducted from “profit” when determining the amount of your capital gains tax exclusion. The items you mentioned are generally part of the adjusted basis of the house and can be deducted from the amount realized from the sale to determine the amount of gain or loss on the sale. Consult IRS Publication 523 for additional information on adjusted basis.
3. Yes, most people have to pay tax regardless of their age. However, older people have a few more deductions and exemptions they can claim.
4. No, “buying into” a continuing care facility is not the same as buying a home.
5. You’ll need to consult an attorney regarding what happens to someone’s money after they die. Ask about setting up a trust of some type and preparing a will.
6. Same thing with names on a deed; I suggest you consult an attorney for information on that. But my personal opinion is that it can be beneficial to have a child’s name on the deed of a parent’s home.

Best of luck.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Rich Hubbard December 19, 2014 at 8:36 am

I bought a HUD house (FHA) in Sept. 13, relocated because of work and divorce. Started renovating right away and I have lived there for the whole time. Paid $115,000 and w/o appraisal I’d say I can ask up to $180,000 for it. Will I have to pay capital gains of up to 15% if I was to sell so I can buy a house closer to work.

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Jeannette December 25, 2014 at 3:30 pm

Hi Rich,

If you live in the house as your main home for less than two years, then yes, you will be subject to capital gains tax on any gain you may realize. The IRS allows an exception to the ownership and use tests relating to employment but it only applies if you have a change in place of employment, not if you decide to move closer to your work.

If you want to avoid paying capital gains tax, then I suggest you hold on for another nine months before you sell.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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melissa December 15, 2014 at 4:37 pm

My parents bought a house back in 1978 for $300,000. They paid off the loan in 1995. They gained $600,000 in equity and pulled it out in 1996. They gifted the house to me and added my name to the title. The house is now worth $1,500,000. I own a business and use about 1500 sq ft out of the 2990 sq ft of the house for business. How much capital gains will I be able to defer after the $500,000 (my wife and I for 121 tax code) or/and how much capital gains will my parents be liable for if we were to use 1031 on part of the home too for business use? We have lived in the house for 2 of the 5 years and have also been working out of our home for the same amount of time.
BTW, my parents still own the home (they are still on title with me)

I was just reading this and the info says that home based business qualifies for 1031. ?

http://www.barbjordan.com/1031-tax-exchanges.html

Also, back in 2006-2008, i rented the house out to a family and i moved away. with this situation would i be able to elect 1031 exchange?

Thank you

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Jeannette December 16, 2014 at 8:07 pm

Greetings Melissa,

I’m not sure that your questions are very clear. I’ll do my best to answer them.
If you sell the home in a 1031 exchange, you are in essence deferring all of the gain at that time, not just $500,000, so no one would be subject to capital gains tax (in the year of the transaction). The fact that you use the home for business purposes is what will make it eligible for the 1031 exchange. Personal residences will not qualify for 1031 treatment. The fact that you rented out the home during 2006 through 2008 is now a moot point.

If you sell the home in a 1031 exchange, live in the new house for at least two years, then decide to sell it, your mom and dad will not qualify for any capital gains tax exclusion (even if they are part owners) if they have not lived in it along with you. Only you will qualify for the exclusion.

The fact that your parents gifted the house to you but are still on the title as co-owners concerns me. If you decided to sell the house instead of doing a 1031 exchange, I believe you would find that you would have to allocate the gain on sale two, if not three, ways. Again, they would not be eligible to exclude any gain if they have not been living in the house with you. I suggest you consult a qualified tax accountant in your area on that issue sometime.

Happy holidays!

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Rob M December 11, 2014 at 1:38 pm

We have a home in NC, but I received PCS orders to KY, so we had to rent out our home. I don’t usually file taxes in NC (I have residency in WA). I’m still active duty military and was wondering if I need to file taxes in NC, for the rental income and if I need to report any other income (i.e. my military pay). Thank you for your assistance.

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Jeannette December 16, 2014 at 6:39 pm

Hi Rob,

I’m sorry, but I can’t comment on what states you might need to file tax returns in. Maybe someone else can. I suggest that you contact a tax accountant in NC.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Shaun December 23, 2014 at 5:20 am

I have that same question, I own a home in CA that I lived in for three years and now I am renting it out, because I have PCS orders to Japan. Do I have to pay income tax on my rental income to CA? Thanks!

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Alison December 10, 2014 at 6:41 pm

Hello,

We just bought a house about two months ago in the midwest. There is a possibility we may move back to the east coast due to my husbands job in the next year. If we haven’t lived in our house for two years yet and my husband gets an out of state job, would that be considered an exemption or do we have to continue to physically live in our house for two years?

Thank you.

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Jeannette December 16, 2014 at 6:50 pm

Hi Alison,

Good news. The IRS provides an exception to the ownership and use tests in some cases. However, the maximum amount you may be able to exclude from taxation will be reduced. One of those exceptions is a change in place of employment.

The requirements include that you used the home as your main home and that the new place of employment is at least 50 miles farther from the home you sold than was the former place of employment. You may want to consult IRS Publication 523 for further information or contact a qualified tax account in your area.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Jeff Richert November 22, 2014 at 12:29 pm

I purchased a duplex in 1990 as an investment. Up until May of 2014 it was used as a rental for that purpose only. I sold my home in May and moved my entire family into the duplex, my wife and I on one side, my twin daughters on the other side. We plan on living here for two years and then selling in order to purchase a house. Will I completely avoid capital gains tax by using this approach. According to my CPA, if I sell it right now I will be subject to approximately $17K in capital gains tax. Also, how do I prove to the IRS that my duplex is my primary residence for the whole family?

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Jeannette November 27, 2014 at 11:00 am

Hello Jeff,

This is an interesting and unique scenario. What did your CPA say?

Because the structure is a duplex, you have to treat it as two separate residences. If you’re living in one side and renting the other, when you sell it, only one half of the home was your primary residence so you would have to divide the gain in half then apply the exclusion rule to one half.

So, in your situation, there are a number of questions I would ask first. Are your daughters paying you rent? If they are, then the reality is, that one side of the duplex is still being treated as a rental property and that would not qualify as a primary residence even if your family is living there.

Does the property have one parcel number for property tax purposes or two? If it has two, then I believe the IRS would consider them as two separate residences and since you (the owner) were only living in one, the other would not qualify for the exclusion, even if you weren’t receiving rent from your daughters.

The other questions are, how old are your daughters? And, are you still supporting them? If they are minor children, then you could argue (perhaps successfully) that they are still under your protection and that you and your family are occupying the entire structure as your primary residence even though there is a common wall separating the units. In that case, I would suggest that all members of the family use one address (if the duplex has two separate ones) as the primary residence address.

But if they are adults, who work and file their own tax returns and would generally be out on their own, then I think the IRS would still see the property as being two separate residences and since you can only live in one, you would not be able to exclude all of the capital gain.

I think your case requires more research and perhaps some creative thinking. If you came to me to prepare your tax return, I wouldn’t do it without first requesting a private letter ruling from the IRS. I suggest you discuss that with your CPA. Good luck.

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Violet November 17, 2014 at 7:41 pm

Do you have to physically live in the “primary residence” or can you just designate the property as your “primary residence” on your taxes to qualify for no capital gains tax?

Basically, let’s say I live at a family member’s home but my primary residence on taxes is designated as above. Can I still qualify for no capital gains tax? Even when I am receiving rental income on that same primary residence.

PLEASE HELP! Thank you!

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Jeannette November 19, 2014 at 11:45 am

Hi Violet,

Yes, you must physically live in a home in order for it to qualify as your primary residence and thus be able to qualify for the capital gains tax exclusion, regardless of the address that you put on your tax return. If you live in a family members home, then that is your primary residence as far as the IRS is concerned even if you don’t own it.

Sorry for the bad news.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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eileen December 4, 2014 at 8:38 am

I own a condo in San Diego, it has been a rental for more than 10 yrs. I live out of state and would like to know my options. If I sell and attempt to do an exchange, will CA tax me as I would not be re investing in CA? If I decide to move to CA for 2 yrs when I retire, could move to worse places, would I then be able to avoid paying tax gains on the property? Do I remember correctly that you can only avoid capital gains on a property one time? I would appreciate any advice you can give me.

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Jeannette December 16, 2014 at 7:03 pm

Hello Eileen,

I can’t comment on how the State of California may tax you but I’m not aware of any rule that says you have to reinvest in the same state. The capital gains tax exemption that the above article is discussing is a federal exemption not a state one. But state taxes are generally based on your adjusted gross income as shown on your federal tax return.

And as long as you meet the “2 in 5” ownership and use tests established by the IRS, you should be able to claim the exemption. Also, the IRS rule is that you can only claim the exemption once every two years.

Happy holidays!

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Eddy M November 11, 2014 at 8:58 am

HI,
Keep reading about the new tax law Jan.1 2009 and basis change once a personal residence becomes a rental.
I am at a crossroad and now have possibility to go either ways. With all that in mind could you please let me know what would be the best move to avoid any (or at least minimize ) capital gain tax?
Home A was bought with partner in Summer 2008 and renovated. Cost basis $160000. Moved in December 2008 as primary residence. It then became a rental in September 2011 ( value could have been 250K at that time if important) and the plan is to keep renting until December 2014. I bought my partner share summer 2014 for 145K.
In the meantime moved into a house B( primary residence) in summer 2012 and been living in it since then. BOTH PROPERTY should sell over their basis price ( A for about $330K) and possibly over 250K profit on the house B but because of location may take a couple years to find buyer. Not sure which way is best to go. Sell now, move into A……One thought is to move back to A for couple years while B is for sale and then sell A after the two years. Also What would happen if B does not sell or is “secondary residence”? What would happen if I moved back to B after two years. etc.
Thank you for your input on best tax scenario.

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Jeannette November 16, 2014 at 4:23 pm

Hello Eddy,

It would be difficult in a forum like this to advise you on your best move because there is more to your total tax situation than what you provided above. So, I’ll offer some insight then suggest that you consult with a qualified tax advisor in your area.

You own two houses: one is currently being rented and the other you live in. You’ve owned both houses for at least two years so you meet the IRS’s ownership criteria for excluding gain on sale from taxation. But, you’ve only lived in one as your primary residence for at least two of the past five years. So if you sold them both at about the same time, you would only qualify to exclude the gain on the one in which you had been living. Hopefully, that house would recognize the most gain.

But if you don’t have to sell both houses at the same time, then the best strategy would probably be to sell the house you’re currently living in and move into the second house and live there for two years. Then sell that house. In that case, you would meet both the ownership and use tests for exclusion of capital gains on both houses.

If you’re not living in a house as your primary residence then yes, it would be considered a secondary residence. There are no circumstances under which the IRS allows you to exclude the gain on the sale of a secondary residence.

If time isn’t a factor, you could move back to house A now and live there for two years. That way you would meet the use criteria and be able to exclude the gain upon sale. You would then move to house B and have to live in it for two years before you could meet the use criteria to be able to exclude the gain upon the sale of that house. But why would you really want to do all that moving around and take an extra two years?

You seem concerned that one house might not sell easily. Did you ever hear the old adage that “price solves all problems?” Take the time to consult a qualified tax advisor in your area. And good luck.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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E. Ben October 21, 2014 at 9:28 am

Hello,
Am selling a NYC Condo. Apartment is our Primary Residence. The requirements for the two year ownership and two years of use (both in the past 5 years), are met.
We travel, during the summer months, to spend with our children and grand-children, abroad, usually for 5 months each year. In the past two years, when we were on those travels, we rented the apartment out.
Besides our visits with our family, each year, during the NY winter we take a 2 months vacation, away, in a warmer climate.
The questions which I raise and would be extremely thankful for answers, are as follows:
I would think that the 5 months of rental periods, each year, can not be recognized as “Qualified Use” period, though the apartment continues being our primary residence even than (for purpose of calculating the Capital Gain), however my question is whether the the 2 months summer vacations can be regarded as Qualified use, and I will not be told that we should have been taking our vacation whilst the apartment was rented out? Should note that the 2 years of ownership and use requirements, are met even without calculating in the family visits and rental periods.
From what I read on the internet learnt that the Federal Capital Gain Tax (on the Non-Qualified use periods) is 15%-20%, NYS Capital Gain Tax is 8.8% and NYC Capital Gain Tax is 3.8%, reaching a whooping 27.6% in total. Is it indeed so? Thanks a lot, in advance, for answers. E. Ben

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Jeannette October 23, 2014 at 8:56 am

Hello E. Ben,

The IRS’s guidelines on use allow for temporary absences. Specifically, “Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use.” And the IRS provides an example that specifies a period of 2 months. So I would say yes, the 2 months that you spend away for your summer vacation can be counted as qualified use. May question would be, would the IRS consider a 5 month vacation period a “short temporary absence.” It’s certainly temporary but they don’t define short. I’ve never presented a return with this scenario. If the time is not a problem for you, then don’t worry about it but I might consider arguing that it does qualify.

And I’m sorry, but I can’t comment on the tax rate you might have to pay. I’m not familiar with the rates in New York. But yes, the federal long term rate can be from 0 to 20% depending upon your tax bracket. Most people fall in the 15% bracket, though.

Best of luck to you.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Jeannette November 16, 2014 at 4:21 pm

Hello Eddy,

It would be difficult in a forum like this to advise you on your best move because there is more to your total tax situation than what you provided above. So, I’ll offer some insight then suggest that you consult with a qualified tax advisor in your area.

You own two houses: one is currently being rented and the other you live in. You’ve owned both houses for at least two years so you meet the IRS’s ownership criteria for excluding gain on sale from taxation. But, you’ve only lived in one as your primary residence for at least two of the past five years. So if you sold them both at about the same time, you would only qualify to exclude the gain on the one in which you had been living. Hopefully, that house would recognize the most gain.

But if you don’t have to sell both houses at the same time, then the best strategy would probably be to sell the house you’re currently living in and move into the second house and live there for two years. Then sell that house. In that case, you would meet both the ownership and use tests for exclusion of capital gains on both houses.

If you’re not living in a house as your primary residence then yes, it would be considered a secondary residence. There are no circumstances under which the IRS allows you to exclude the gain on the sale of a secondary residence.

If time isn’t a factor, you could move back to house A now and live there for two years. That way you would meet the use criteria and be able to exclude the gain upon sale. You would then move to house B and have to live in it for two years before you could meet the use criteria to be able to exclude the gain upon the sale of that house. But why would you really want to do all that moving around and take an extra two years?

You seem concerned that one house might not sell easily. Did you ever hear the old adage that “price solves all problems?” Take the time to consult a qualified tax advisor in your area. And good luck.

(Please note: I am a California CPA. However, I don’t primarily do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Dirk Vossenaar October 18, 2014 at 4:31 am

Dear Jason,

I red your column with great interest and would like to ask you a question.

Info:
Both my wife and I are Dutch and live in Spain, a great country in Europe with not too great winter climate. We have choosen to spent the winter month in Florida, where we have a Condo (already for more than 10 years).
My wife is 80 years old and I am 86.

Question:

What can be deducted from capital gain at a sale of our condo.

- Home improvemnts ? ( we reasently upgraded the kitchen)
- replacement cost of olds equipment ? (we recently repalced the central heating – equipment and the hot wather boiler).
- losses on the Us Stock exchange in the past 5 years ?
- Lawyers Fee’s ?
- Realestate Fee’s ?
- Any other ?

Look forward to your reply.
Kind regards,

Dirk
e-mail: cendvos@gmail.com

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Jeannette October 23, 2014 at 9:41 am

Hola Dirk,

I hope you don’t mind my responding to your question.

First off, nothing can be deducted from the capital gains tax that you might have to pay. However, some of the items that you listed can be included in the calculation of gain and thus, capital gains tax that might be owed.

Capital gains tax is paid on the gain (or profit) from the sale of a home that cannot otherwise be excluded. Gain or loss is calculated as follows:

Selling price – selling expenses = amount realized – adjusted basis = gain/loss

The amount you realize from the sale is the selling price minus selling expenses such as commissions, advertising fees, and legal fees. So any expense that is legitimately an expense of selling the property can be deducted from the selling price. Your adjusted basis in the property is calculated by taking your beginning basis (usually the price you paid for the property) and adding things like the cost of additions or improvements that have a useful life of more than 1 year (kitchen and mechanical improvements) or special assessments, and then subtracting things like deductible casualty losses, certain tax credits you may have taken, and depreciation (if any).

If you do in fact realize a gain, the IRS allows you to exclude up to $500,000 of that gain from taxation if it is on the sale of your main home and you meet all of the conditions. I’m not familiar with the filing of US tax returns by non-US citizens so I would suggest you consult a qualified tax accountant in your area to help you with this. Or you can read IRS Publication 523 for more information.

Chao

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Sherry October 17, 2014 at 1:32 pm

Hi Jason,
My husband and I did a 1031 exchange (rental to rental) in 2002. We are considering moving into the rental as our residence and then 2 or more years later selling it.
Question is when we do sell it will we be able to take the tax exclusion of $500,000 per married couple or not? and will we pay gains on the appreciation of the property since the time we purchased or the total sale of the house? We live in Calif and the property in question is in Honolulu.
Thank you,
Sherry

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Jeannette October 30, 2014 at 3:04 pm

Hi Sherry,

I hope you don’t mind me responding to your questions. The IRS will allow you to exclude from taxation up to $500,000 of any gain you realize on the sale of your home if you meet the ownership and use tests. You must have owned the home for at least 2 years and have lived in it for at least two years during the 5 year period ending on the date of sale. So, if you’ve owned the house since 2002, you meet the ownership test. And if you live in it for at least two years before you sell it, then you would meet the use test as well and yes, you would be able to apply the exclusion.

As for paying tax, you only pay tax on the gain you realize when you sell the home (if you can’t exclude it), not on the sale price of the home. Gain is calculated as follows:

Selling price – selling expenses – adjusted basis of home = gain or loss

You may want to consult IRS Publication 523 for more information on the subject. Hope that helps.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Kim Tyser October 10, 2014 at 11:45 am

Hi, I hope you are still responding to questions here! In 2011 I moved out of the home I purchased in 2006 because of a substantial decrease in pay and I couldn’t refinance at that time. So, I’ve been renting my home since 2011 and living with my sister (the rent has never paid my mortgage!) A year ago, I was laid off :-( I’ve been thinking of selling my rental home but it sounds like any small profit I make will be taxed to death because it’s a rental. I don’t meet the requirement now to have lived in my home 2 out of the last 5 years because I began renting it in Feb, 2011. If I sell my home now, it sounds like the capital gains tax won’t be that high because I have no income – I suspect that when I get a job again my income will be on the low end based on where I’m currently living. This is correct? How can I find out an estimate of what the tax would be comparable to my income? Do you think it would be better for me to move back in and wait 2 years to sell it? Thanks in advance!!

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Jeannette October 14, 2014 at 9:12 am

Hello Kim,

Generally speaking, for most taxpayers, net capital gain is taxed between 0 and 15%. If you currently have very little or no regular income, then your capital gain tax could very well be $0. So this could be a good time for you to sell.

You won’t know how much capital gains tax you might have to pay until you calculate what your realized gain will be (if any). Gain is calculated using the following formula:

Selling price – selling expenses – adjusted basis = gain or loss

Determining basis can be tricky. In your case, your beginning basis would be the fair market value of the home at the time you converted it to a rental property. Adjusted basis then, is beginning basis plus or minus certain amounts such as additions or improvements, special assessments, and depreciation allowed or allowable. Play with the numbers a bit and see where you are.

In my opinion, it’s almost always better to sell a house that was your main home rather than a rental house because of the ability to exclude gain from taxation. However, again, in your case, it might not be a bad situation for you now. It’s hard for anyone to advise you on what to do until they have a full picture of your complete tax situation.

I suggest that you consult IRS publication 523 to better educate yourself on the subject of selling a house that was used as a rental property then meet with a qualified tax accountant in your area. Call around some, you might find a consultation free of charge. Good luck.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Ron October 9, 2014 at 5:41 pm

how much in taxes does a property owner owe if they rent their property through HUD?

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Jeannette October 14, 2014 at 8:28 am

Hey Ron,

I’m not sure I understand your question. Are you asking about tax on rental income or tax on the gain from the sale of a rental property?

Either way, I don’t think the IRS cares who you rent the property to or through. Both sources of income will be taxed at the rate in effect for the tax year in which the income is earned.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Stefanie Barone October 5, 2014 at 9:36 pm

HI,
My husband and I sold our house in August 2014 and closed on our new house 3 weeks later. We moved to a different state and are planning to move back to CA next year after his job finishes. We want to buy in CA but want to pay as little capital gains as possible. We will have lived in the house for only a year. I read that if your income is in the 10-15% tax bracket then as long as its a year and a day we wont pay taxes. Is this true? Should we rent our house out in WA and just plan to pay capital gains tax? Also, do they take out the capital gains tax after the close of the house or at tax time? We want to make the right financial decision, but also want to move back to CA.

Stefanie

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Jeannette October 7, 2014 at 10:02 am

Hello Stefanie,

I’m not aware of any rule such as the one you described. The IRS’s guidelines on exclusion of gain from the sale of your main home require that you meet the ownership AND use tests: you must have owned the home for at least two years and have lived in it as your main home for at least two years. But in addition, you can only use this exclusion once every two years.

However, if you own and live in the new house for less than two years, you may still qualify for a reduced exclusion because of your husband’s change in place of employment. I suggest that you consult a qualified tax accountant at tax time to help you with your 2014 return (as you’ll no doubt be claiming an exclusion if you realized a gain on the sale of your house in August) and to determine if you will qualify for a reduced exclusion when you sell the house you currently own. That may help you to decide if you want to take on the burden of being a landlord and renting it or to simply sell it.

Capital gains tax is not withheld from the proceeds when you sell a home. You are responsible for correctly reporting the sale and paying any tax that is due when you file your tax return for the year in which the house was sold.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Neil October 2, 2014 at 11:30 am

I purchased a home with my ex-wife in 2009. We lived in the house for a year and divorced in 2010. I was then forced to relocate to a different city. I’m planning to sell the home in April/May and I would like to use part of those proceeds to put into a new primary residence. What options do I have to avoid paying capital gains tax? I own a business and take a business deduction for a home office if that makes any difference.

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Jeannette October 6, 2014 at 4:52 pm

Hi Neil,

If you’ve been renting the house since 2010, then your only option to AVOID paying capital gains tax is to move back into it and live in it for at least 24 months. You do have an option to DEFER capital gains tax as explained by the author above. A 1031 exchange is perhaps the best option but requires advance planning. Be sure to consult a qualified tax accountant in your area if you want to consider this option.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Terri J October 1, 2014 at 10:04 am

My husband bought undeveloped land in 1973. We married in 1974 and began building our first home. We lived in it for 8 years before moving away take a job and the house has been rented since then. We are now retired and would like to sell the house but it seems pretty clear that more than 50% would be taken in taxes at this point, as we are not interested in being landlords again; however, we want to protect our “nest egg” and keep as much of the proceeds from the sale as possible. Because we are retired and able to do so, we are considering moving back into the house for two years before putting it on the market. Does this sound like a reasonable plan?

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Jeannette October 6, 2014 at 4:32 pm

Yes.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Dave September 26, 2014 at 4:14 pm

Hello and thank you for your very helpful responses at this site!

I have a question regarding the Housing Assistance Tax Act of 2008 and how it may impact my Capital Gains exclusion upon sale of my property.

My wife and I owned and lived in our home from 2003 to 2013 as our primary residence. In November 2013, I moved for work and we converted our home to a rental. If I continue to rent the home and then sell prior to November 2016, will we still qualify for $500k in capital gains exclusion (because we lived in the home 2 of the prior 5 years preceding the date of sale), or will we have to pay capital gains on a % of our gains because of the Housing Assistance Tax Act of 2008 (since the property was used as a rental subsequent to Jan 2009)?

Thank you!

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Jeannette September 29, 2014 at 2:36 pm

Hi Dave and you’re welcome,

Good question. If you meet the “2 out of 5” use test, then yes, you will qualify for the capital gains tax exclusion. But at the same time, as a result of the Housing Assistance Tax Act of 2008, you will have to pay capital gains tax on a percentage of the gain on the sale of your main home if you have a period of nonqualified use; the bigger the period, the less that is subject to the exclusion.

The Housing Assistance Tax Act of 2008 changed the rules on how much of the gain from the sale of a primary residence can be excluded from taxation. I don’t like to muddy the waters when writing in a forum such as this so I remind people that they can exclude up to the IRS’s maximum amount. But since you mentioned it, here goes……

IRS guidelines say, “You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home [if you meet the ownership and use tests].” Nonqualified use means any period beginning on or after January 1, 2009 where neither you nor your spouse used the home as a main home. Non-qualifying use prior to January 1 is disregarded when calculating the capital gain allocation.

The amount of gain that will qualify for the exclusion then is based on the amount of time of qualifying use. Qualifying use is the amount of time that you did occupy the home as a main home.

Non-qualifying use is expressed as a percentage of total use of the home over the five year period ending on the date of sale. For example, if you rent out a home for 3 years and live in it for 2, then your ratio of nonqualified use over the last five years is 3/5 or 60% and your percentage of qualified use is 40%. Thus, if your net gain subject to allocation is $100,000, then $60,000 is taxable capital gain and the remaining $40,000 is subject to the exclusion.

Your non-qualifying use began less that a year ago, so my suggestion would be to sell the property as quick as you can. That way, your unqualified use percentage will be less and more of your gain will be subject to exclusion. You may want to consult IRS Publication 523 for more details. Good luck.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Shirley September 19, 2014 at 2:33 pm

Hello,
My husband & I are selling our primary residence and moving to our rental house that was purchased in 1978. Therefore converting a rental to our primary residence. How long do we have to live there before we can sell and exclude the capital gains tax, 2 years, 5 years? It is confusing to say the least.
Thank you

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Jeannette September 22, 2014 at 4:33 pm

Hi Shirley,

Since you’ve owned the rental house for more than two years, the answer to your question is at least two years. Please refer to my reply to Kathy’s situation below for further details.

But also note that the IRS only allows you to use the gain exclusion once every two years. So if you will be excluding gain from the sale of the residence you are currently selling, then be very aware of your time frames so that you don’t violate their rule.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Kathy September 19, 2014 at 12:23 pm

I bought my house in 2008 as a primary residence. Due to a job transfer, we moved and rented out the house in January of 2012. The tenants have been there for close to three years, and are moving out soon. If I want to take advantage and not pay capital gains, do I have to sell my house before January of 2015? It is currently September 2014, and being in the Northeast, I’m not sure if I can get my house sold and settled within three months during the colder months.

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Jeannette September 22, 2014 at 4:17 pm

Hi Kathy,

By my calculations, no, you do not HAVE to sell your house before January of 2015. But I don’t know exactly when you moved out and when you’re going to move back in.

The IRS requires both an ownership and a use test to determine if you can exclude the gain on the sale of a home from taxation. Both tests have a two year requirement based on the DATE OF SALE of the home.

According to the IRS, you must have owned and lived in the home for at least two years during the five year period that ends on the date of sale of the home. Luckily though, in the case of living in the house, that two year period does not have to be continuous. Meaning, if you live in it for 20 months then move out for 36 months, then move back in again, as long as you live in it as your main home for at least another 4 months before you sell, you should then be able to meet the two year requirement.

To make a determination in your case, you need to work backward from the anticipated selling date. I suggest you draw a time line and then do the math. If, for example, you sell the house on Dec 31, 2014, then the five year period ending on that date began on Jan 1, 2010. If you don’t think you’ll sell the house until March 31, 2015, then the five year period began on April 1, 2010.

I recommend you consult IRS Publication 523 for the full scoop on selling your home. Then if you still have a question, consult a qualified tax accountant in your area.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Mariyana September 14, 2014 at 8:37 am

I bought a condo in 2011 and it has been my primary residence for the last 3 years and it is only under my name. My boyfriend and I are moving to Seattle for a promotion and will be renting an apartment so the condo will still stay as the primary residence. If I rent out my condo for less than 6 years and decide to sell would I still have to pay CGT? Also if we decide to move back home and move back into the condo how long would I have to live in it again so I could avoid paying CGT? Thanks!

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Jeannette September 16, 2014 at 12:33 pm

Hello Mariyana,

The IRS’s use test for exclusion of capital gains from taxation says you must have LIVED in the home as your main home for at least two years during the five year period ending on the date of sale of the home. If you move to Seattle and LIVE in an apartment there, you are no longer LIVING in the condo even though you may consider it your primary residence.

So, if you rent out the condo for more than three years during the five year period ending on the date you sell it, then yes, you will be subject to capital gains tax if you do in fact recognize a gain on the sale. Luckily though, the two year period does not have to be consecutive. So you could conceivably live in the condo for 12 months, rent it out for 48 months then live in it again for 12 months (or any similar combination of months) just before you sell it and meet the IRS’s use test.

I recommend you consult IRS Publication 523 and review the section on excluding gain so that you fully understand the rules before you embark on your move to Seattle. Good luck. (I was just in Seattle. It’s really lovely there.)

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Joe September 11, 2014 at 11:48 am

I purchased a home in April 2006 for 180k as my primary residence. Major renovations totaling approximately 175k were done in 2008. Unfortunately this work was not done by a contractor and I did my best to compile all receipts but for the sake of this discussion, let’s assume I have none. I married in 2009 and file jointly. In January 2011, the house was converted to a rental and we have not lived there since. We are considering a sale since we lived in the home for 2 of the last five years, however since it’s currently a rental will I still get the 500k exclusion or do we have to be currently living in it when it sells? We expect to sell for $440k. I’m so confused on everything I’m reading. I plan to meet with a CPA but thought maybe someone could shed some light. Thanks!

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Jeannette September 16, 2014 at 12:02 pm

Hey Joe,

I’m glad to hear that you’re going to meet with a CPA. In preparation for that, you may want to consult IRS Publications 523 and 527 (which deal with rental property and selling a home) to become familiar with the IRS rules and terminology.

The answer to your question is no, you do not have to be living in the home when you sell it to qualify for the capital gains tax exclusion. However, you do have to show that you lived in it for 24 full months during the five year period ending on the date of sale. By my calculations, you haven’t. Let’s say you sell the house on 9/30/14. The five year period that ends on that date began on 10/01/09. If you converted the property to rental use on 1/01/2011, then you would have only lived in the house for approximately 15 full months during that five year period. In that case, you would not meet the IRS’s use test.

And having or not having receipts for your renovations probably isn’t a factor in your case because the basis for determining gain on the sale of a rental property converted from personal use is generally the fair market value of the property on the date it was converted to rental use. But be sure to check all of that with the CPA. Good luck.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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mich September 11, 2014 at 11:20 am

My question is: we bought a duplex in 2011, lived in one side for 2 years and have had it rented out since then. The other side has always been rented out. we are looking at selling it now but there will be a 80K profit. how much in taxes are we looking at paying (percentage). I dont know if we would qualifiy for the 2/5 rule since it is a duplex. Thanks

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Jeannette September 16, 2014 at 11:13 am

Hi Mich,

I have some experience with duplexes because I own one. Because you lived in one side for a while, you will need to view it as two separate residences. Meaning, you should divide everything in half and apply the guidelines to each side separately. If you bought the duplex for say $200,000, you paid $100,000 for each unit. If you sell it for $300,000, you’ve sold each unit for $150,000.

That also means that you have to apply the IRS’ ownership and use tests (the 2 in 5 rules) to each side independently. If you didn’t occupy unit #1 for at least two years, then the entire gain on that unit would be subject to tax. If you occupied unit #2 for at least two of the preceding five years up to the date of sale, then you should qualify to exclude up to $500,000 (married filing jointly) of gain.

As for how much tax you might pay, that all depends on your marginal income tax bracket and your income level, and you didn’t say what those are. I’m not sure if the IRS is planning any changes to the tax law regarding capital gains for 2014, but as of now, if your marginal income tax bracket is 10 or 15%, the capital gains tax rate is 0%. But if your tax bracket is between 25 and 35%, then the capital gains tax rate is 15%. If your tax bracket is higher, ouch.

I recommend you consult IRS publications 523, 527 and 544 which all deal with income property and selling a home. Then make sure you consult a qualified tax accountant before closing the sale so you know exactly what you’re in for.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Karrey September 9, 2014 at 8:40 pm

HI, I bought a condo in 1994 for $144K. I got married 2005. Took equity out to purchase another condo. Current loan on condo is $350K ouch. It will sell for $400K. It’s been a rental for almost 10 years. We can’t do a 1031 exchange. Will we be taxed on approx $56K Our combined income is $120K. Yikes any recommendations? I don’t think we can get a buyer to do the installment payments.
Thank you
Karrey

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Jeannette September 12, 2014 at 10:34 am

Hello Karrey,

First, I don’t think you’re calculating your gain correctly. Gain on sale is “selling price minus selling expenses minus adjusted basis of the property.” If your selling price is $400K and we estimate your selling expenses at say $26K (6% commission plus other costs) and your adjusted basis at $144K (for lack of information), then your gain from the sale will be $230K. Bigger ouch!

If you haven’t actually sold the condo already, you may want to seriously consider doing as the author suggests and move back into it and occupy it as your main home for two years. It’s too bad that you can’t do a 1031 exchange. What about a deferred sales trust as described above? I don’t think you understand that it’s not the buyer who makes installment payments. From the little that I know about a DST, the buyer’s money is put into a trust fund that you establish and the trust then sends payments to you as you need the income. I suggest you visit with a tax or trust attorney who knows something about these.

Other than that, I recommend that you immediately make an estimated tax payment with the proceeds from the sale. Good luck.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Cathy Burkitt September 8, 2014 at 12:50 pm

I lived in the house for 3 years and the last year I am renting but now are thinking of selling. Do you know if I pay any capital gains?

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Jeannette September 12, 2014 at 10:05 am

Hi Cathy,

No, I don’t know if you will be subject to capital gains tax because you didn’t state what the adjusted basis of the property is and what you expect to be able to sell it for. What I can try to answer is whether or not you would meet the IRS’ guidelines for exclusion of any gain you might have from taxability.

If you do recognize a gain on the sale of the home, being able to exclude that gain from taxability will be based on the IRS’s qualifying tests. To claim the exclusion, you must have owned the home for at least 2 years during the 5-year period ending on the date of the sale of the home AND have lived in the house as your main home for at least 2 of those five years.

It would appear that you meet the ownership test because you indicated that you’ve owned the home for approximately four years now. And it would appear that you meet the use test because you indicated that you lived in the house for at least two of those years. So, subject to the actual dates of purchase, sale and when you first rented it, it would appear that you would be able to exclude up to $250,000 ($500,000 if married filing jointly) of gain from the sale from taxation.

I suggest you consult IRS Publication 523 for further details or arrange to meet with a qualified tax accountant in your area. Good luck.

(Please note: I am a California CPA. However, I don’t regularly do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Justina September 3, 2014 at 9:32 pm

Me and my husband own a single family house since 1991 but we place it in a family limited partnership in 2013. can we still get the tax exemption when we sell?

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Jeannette September 9, 2014 at 5:06 pm

Hi Justina,

I assume you’re referring to the tax exclusion on the sale of a primary residence. The answer to your question depends on quite a number of things. But primarily, are you living in the house or renting it out? How was the limited partnership structured?

I suggest that you sit down with a qualified tax accountant in your area so that you can fully understand the circumstances and get the best advice.

(Please note: I am a California CPA. However, I don’t do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Justin August 14, 2014 at 9:31 pm

Hello,

My wife and I purchased a home back in 2010 and lived in it for almost 3 years. We then bought a bigger house and rented out our first one. I am active duty and we are being transferred to another city and we are looking to sell both houses. will we have to pay any capital gains on either house? Also when I say my wife and I purchased the houses they are actually both in just my name.

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Jeannette August 19, 2014 at 9:29 am

Hi Justin,

There’s much more to say in your case than one can say in this type of forum; but here goes:

You only have to pay capital gains tax if you realize a gain when you sell a home. And even then, the IRS allows an exclusion on the sale of your primary or main home and a deferral on the sale of a rental property.

Will you realize a gain on the sale of either home? The formula to figure gain or loss on the sale of a home is:

Selling price – selling expenses = Amount realized – adjusted basis = Gain or loss

The IRS will allow you to exclude from tax up to $250,000 ($500,000 if married filing jointly) of the gain on the sale of your main home if you meet the requirements. In most cases, you must have owned and lived in the house as your main home for at least 2 years during the 5 year period ending on the date of sale. But you can only exclude gain once every two years. So you probably would not be able to exclude gain on both houses in the same year. IRS Publication 523 – Selling Your Home, provides more information on this subject.

With a home that you have rented, it’s a bit different. The IRS only allows a deferral of tax on the gain. So if you’re interested in that, the author discusses one method of deferral above: A like-kind exchange. To be a like-kind exchange, there must be an exchange of properties that are similar in nature and character even if they differ in grade or quality. But like-kind exchanges can be tricky, so it’s important to plan in advance.

I recommend that you consult a qualified tax accountant in your area very soon to help you plan for these events. Good luck.

(Please note: I am a California CPA. However, I don’t do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Saba August 11, 2014 at 8:09 am

Hi,

I purchased a townhouse as a primary residence in 2014. In 2009 I rented the property out because I was going to graduate school full time and not earning income. I’m finished with graduate school and I’m renting out a one bedroom apartment. I want to sell my townhouse because I can’t afford the mortgage and I don’t want to be a landlord anymore. My questions are:

Because this is my ONLY property I own, am I subject to capital gains?

If I must reinvest, does the home HAVE to be a rental? Or can I purchase a property and live in it as my primary residence?

Thanks!

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Jeannette August 13, 2014 at 4:09 pm

Hi Saba,

First, paying capital gains tax is not dependent upon how many properties you own. You will be subject to capital gains tax on the sale of any asset (such as a home) if you realize a gain upon the disposal of the asset and cannot validly exclude it from taxability.

That being said, it sounds like you have owed the property for at least five years but have not lived in it for at least two years during that time (the dates you specified are a bit confusing). If that is the case, you will be subject to capital gains tax on the sale of the property if you realize a gain and you do not take steps to defer it.

The author mentions using a Section 1031 exchange as a way to defer tax on the capital gains. This is referred to as a Like-Kind Exchange. The IRS requires that there be an exchange of properties of the same nature or character, even if they differ in grade or quality. Also, the property you receive must be held by you for investment or use in a trade or business. However, there may be an acceptable time after which you could occupy the property as your primary residence and then when you sell it, you could be eligible to exclude the gain.

You may want to refer to IRS Publications 527 and 544 for further information on this subject. However, this can be a complicated issue so I strongly suggest that you find a qualified tax accountant in your area now and discuss your options. The accountant will be able to help you determine if you will realize a gain from the sale and how to orchestrate a 1031 exchange if you choose. You may also want to ask him or her about a deferred exchange. Good luck.

(Please note: I am a California CPA. However, I don’t do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Charley August 3, 2014 at 9:43 am

I purchased a home in 1980 and lived in it for a few years..for the past 25 years it has been a rental. Am I able to move back into it as my primary residence and after two years sell it and avoid the captial gains tax? I thought I had heard a few years ago that the 2 of 5 rule had gotten more restrictive.. maybe a calculation of how many total years owned vs how many years it was rented out during ownership? I am just a bit confused.

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Jeannette August 7, 2014 at 2:16 pm

Hi Charley,

I believe the answer to your question is yes (note: there is a maximum amount that can be excluded). Being able to exclude the gain on the sale of a home hinges on what occurred during the five year period ending on the date that you sell the home. For example, if you sell the home on September 30, 2016, the five year period in question would be October 1, 2011 to September 30, 2016.

The IRS requires that you have owned the home for at least two of the five years; and it sounds as though you meet that requirement. AND, you must have lived in it as your main home for at least two of the five years (I’m not sure if that’s any more restrictive than previous years). So, if you move into the house by October 1st of this year and occupy it as your main home, you will meet that requirement as well.

However, if you move in on October 1, 2014 but need to sell it prior to September 30, 2016, although you will not have lived in the house for the full two years, in most cases, you can still claim the exclusion; you just won’t be able to claim the maximum amount. You may want to consult IRS Publication 523 for additional information on this subject.

(Please note: I am a California CPA. However, I don’t do tax returns. You can read my blog at http://www.smallbushelp.com.)

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Steve P July 28, 2014 at 11:33 am

My wife lived in her mom’s town home for at least two years before her mom;s passing. We are currently in the process of renting the unit out until we deem fit to sell.

The house was not left in the will (the mom died intestate); but a qucik-claim deed was filed, and my wife is not responsible for the taxes and the mortgage. If we file taxes as jointly married couple, can we 1) claim and get back the interest paid every year in our returns, and 2) does my wife have to pay a (one time) capital gains tax while we she is renting it?

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Jeannette July 31, 2014 at 10:57 am

Boy Steve, you’ve got a lot going on there. Like, if your mother-in-law died intestate, who was appointed trustee of her estate? Has the estate been settled? Who legally owns the house now? If your wife isn’t responsible for the taxes and the mortgage payments, then who is? Who is responsible for filing your mother-in-laws final tax return? Did this happen in 2014 or prior?

In an attempt to answer your questions: 1) typically, you can deduct on your tax return (you don’t get it back per se) interest paid on a home mortgage that is secured by your main home or a second home THAT YOU OWN. If your wife isn’t responsible for paying the mortgage, then what interest are you paying that you want to claim on your tax return?

And 2) capital gains tax is only paid after a property is sold and only if you recognize a capital gain so no, there is no tax to be paid while it is being rented. But if you are collecting rent, you will have to declare that as income and pay tax on it.

You may want to consult IRS Publications 530, 535, 544 and 527 for more specific information. However, with all that’s going on, I very strongly suggest that you consult a tax accountant now and have a professional prepare your tax return for 2014; don’t try to do it yourself. Good luck.

(Please note: I am a California CPA however, I don’t do tax returns.)

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Peter July 15, 2014 at 1:36 pm

I have a rental property that I bought in 2011 that I would like to sell. I paid 400K and expect to sell at 750K. I also purchased two more rental properties this year for 140K each. Can I pay off the mortgage for the two new properties that I bought this year using the capital gains and will that count as equal transfer to avoid paying taxes on the capital gains?

Thanks,
Peter

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Jeannette July 21, 2014 at 9:00 am

Hi Peter,

Yes, you can pay off the mortgages on the two new properties with the proceeds from the sale of the 2011 property (actually, that would be a really great idea), but no, that won’t help you to defer paying taxes on the capital gain.

I believe what you’re asking is, “would this qualify as a 1031 exchange?” Because you have already purchased the two new properties, it won’t. The IRS has very specific guidelines regarding 1031 exchanges and most of the requirements have to be in place before you sell the existing property and before you buy any new property. Consult IRS publication 544 for further information.

But if you haven’t sold the 2011 property yet, maybe you can still orchestrate a 1031 exchange. I recommend you contact a qualified tax accountant in your area.

(Please note: I am a California CPA however, I don’t do tax returns.)

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Joe June 5, 2014 at 8:10 am

I retired from the military about 1 year ago and have been transferred many times since purchasing my home in 1993. The last time it was my primary residence was 2000-2003; it has been a rental since. I am now selling the property and would like to know what capital gain tax exclusions I may qualify for.

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Jeannette June 27, 2014 at 3:47 pm

You will want to consult IRS Publication 544 as well as Pub. 551 and probably Pub. 527. There may be others. Better yet, visit a qualified tax CPA in your area.

Right off the bat, the answer to your question as I see it is, “there aren’t any.” However, if you haven’t yet sold the place, consider orchestrating a Section 1031 Exchange (as discussed by the author) which will help you to defer any capital gains tax. If you’ve already sold the place, it’s too late.

If you can’t do a 1031 Exchange, the author also mentions a new tax deferral vehicle called a Deferred Sales Trust that might work for you. Consult a qualified tax attorney regarding a DST.

(Please note: I am a California CPA however, I don’t do tax returns.)

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Angie April 3, 2014 at 6:56 pm

I bought my home in 2007 for $550K. In May 2011, I moved and have rented for the last 3 years. I now plan to sell. The home value is approx. $450K. I have heard that we can not use the capital loss to offset other capital gains from other investments. What I have been told is that we must reset to the value of the house (at the time or rental) to approx. $350K. Do you know the answer to this or where I might go to find this?
Thank you. Angie

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Jeannette June 27, 2014 at 4:06 pm

Hi Angie,

You will want to consult IRS Publication 551 and Pub. 544. Better yet, visit with a qualified tax CPA in your area.

You appear to have two issues going on:

1. Capital gain or loss from the sale of a rental property off setting other capital gains or losses; and,
2. Establishing basis to determine if you have a gain or loss on the sale of your rental property

Number 2 first: Loosely stated, to determine the basis of the rental property (to determine gain or loss on the sale), you will start with the fair market value (FMV) on the date you converted it to rental use – instead of the price you paid for it or what it might be worth when you’re ready to sell it – then add the cost of any improvements that you made and subtract the amount of depreciation that you took. Pub. 551 will be your guide.

The issue of capital gains and losses can be rather complicated. Yes, some capital gains cannot offset capital losses and vice versa. But you don’t know if you have a capital loss on the sale of the property until you determine the property’s basis and then see what dollar amount you realize from the sale.

A local qualified tax CPA will be your best advisor.

(Please note: I am a California CPA however, I don’t do tax returns.)

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Leigh March 13, 2014 at 10:32 am

Recently purchased a home built in 1987. At the same time we purchased a piece of property in the same neighborhood. Will have lived in the house one year in July, but are considering building a new house on the property and renting out the older home. What length of time should we stay in the home before moving and what kind of tax hit will we take by moving out before 2 years.

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Jeannette June 27, 2014 at 4:21 pm

Hi Leigh,

You will want to consult IRS Publication 523 and Pub. 551. Better yet, visit with a qualified tax CPA in your area.

In 2013, the amount of gain on the sale of your primary residence that you could exclude from income was $250,000 ($500,000 on a joint return in most cases.) I’m not expecting that to change for 2014.

But in order to do that, you must have lived in the home for at least two years. If you move prior to two years, you will be taxed on the full amount of any realized gain. You’ll only know what that amount is after you’ve determined the homes basis and the amount that you realize from the sale. But you can probably estimate it at this point.

(Please note: I am a California CPA however, I don’t do tax returns.)

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Juli Mac March 11, 2014 at 5:11 am

I have heard the 2 out of 5 year rule has been discontinued or altered. Plus that depreciation resets the basis (calculated as if you had taken it even if you didn’t). With depreciation recapture 25%, plus cap gains, plus surcharge of 3.8% on investment income the tax load seems quite high. Plus my rental is in the worst zone for hurricanes/floods and flood insurance, already steep, will be going up 25% per year plus $250 PER YEAR. The rules were much more reasonable when I bought it and when I started renting it out (12 years ago). I couldn’t qualify for another mortgage now, too broke due to previous bad tenants x 2 and companies I worked for going out of business. Any advice please? Will I still owe a bundle if a hurricane destroys the house?

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Gwen Robinson February 16, 2014 at 4:59 pm

I bought a house in September of 2008 to live in myself. But it was tenant occupied at the time. Rather than kick them out, I let them stay there until the end of their lease in March of 2009, which is when I moved in. I lived there for a little over 2 years until June of 2011, when I got married and moved to my husband’s house. The old house has been rented out since then (for the last 2 year 8 months). If I sell that house now, am I exempt from paying capital gains tax since I have lived there 2 years out of the last 5? Someone told me that when you first start out renting a place out, the 2 out of last 5 years rule does not apply. Instead, you can only be exempt the percentage of time you had it as your primary residence out of the duration of the time you owned it. If this is true, this means only 2/5ths of the profit I make on the sale is tax exempt. Does this sound correct? But I did not buy this house as income property. I only let the old tenants live out their lease. Two accountants have given me conflicting answers to this question. Please advise!

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Daryl Meiser February 9, 2014 at 7:14 pm

I would like to sell my rental property and purchase a second home as my work is moving me to another state but I want to keep my primary residence. How does this affect capital gains tax?

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Steve Palmer February 9, 2014 at 8:57 am

I have been renting a room out of my main home that I have owned and always lived in. To offset rental income, I had been depreciating a portion of my home. I stopped renting the property at the end of February 2013. In May of 2013 I sold my home. I know I am eligible to exclude the gain on the sale of the house as I have lived in it from day 1. But my tax program wants to add back in ALL of the depreciation that I took since the day I started renting it as a long term capital gain. The Tax program also wants to use the total depreciated amount to lower the basis of the house. Seems like a double wammy to me. Is there a way to avoid paying capital gains on the depreciated amount in my situation?

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Jug Bedi January 30, 2014 at 3:17 pm

If I have lived in a primary residence for 26 years and then rent it out, can I still claim tax exemption when I sell it? If so within how much time I must sell it without loosing the tax exempt benefit

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Rachel June 12, 2014 at 7:07 pm

I purchased a town home in Calif in 1975 and lived there till 2009 and then rented it out til 2013. Can I deferr capital gain. Am I able to depreciate the property. Also in the years I lived there and made improvements can I deduct such to reduce my capital gains

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freida hernandez January 24, 2014 at 11:16 am

I bought a house in mt name over 2 yrs ago for my daughter and claimed it as rental property and took depreciation and upkeep off of my taxes for a 2 yr period. Am selling the house now and profit from original sales price will br 45k. Do I have to pay capitol gains tax…since I owned the property. For over 2 yrs. I did not live in the house?

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pryncesa January 22, 2014 at 7:55 am

Do I have to paid taxes in a investment property if only for the purpuse of the taxes I made figure that I live in one and I ‘m renting the other level?

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Patti Bodor December 22, 2013 at 9:55 pm

I recently sold my rental property for gain in September 2013. Can I still do a 1031 exchange by buying a fourth of ownership in another rental property? The value of the 1/4 ownership is higher than the total amount of the sold rental. I don’t have much time left to make this decision. Thanks very much in advance.

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alison chen October 25, 2013 at 5:20 pm

Hi, Jason:

We lived in a single family house from 2005-2011 June. From July 2011 we rent it out up to now. If we sell this house and close escrow before June 2014, do we need to pay the tax for capital gains?

Thank you for sharing so much information to us.

Alsion

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Fernando November 29, 2013 at 3:08 am

Alison,

I’m in the same boat as you are and was wondering if you’ve come up with any good information?

Fernando

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Tammy S October 20, 2013 at 10:04 pm

I bought my house in 1984 for 74,500. Raised my family and got it in the divorce in 2007. My daughter married and lived there and I bought a house in 2008 for over $250,000 20 miles away closer to work. Being a young family they needed a safe place to live and I hardly collected anything for rent from them in those 6 years. 50 Percent of fair market rental so my tax advisor indicated that because I was within $100 not to claim as rental property. In 2013 I sold the home she lived in her 26 years to her and husband for $135,000. Are there any allowances for home sale to immediate children for capital gains reductions?

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Susan schnitzer October 9, 2013 at 9:29 am

If we sell a single family rental property and purchase a multi family rental property, live in one unit, will we still qualify for section 1031 exchange?

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Jacqueline October 1, 2013 at 6:52 pm

I’m currently living in my Townhome because I took advantage of the Making Home Affordable Program offered by the Obama administration. I took cash out of it 8 years ago to buy another property in another country. My question is when I sell the Townhome here, do I pay capital gains on my original purchase price? Or do I pay it on my current mortgage payment which is 200,000 more than my purchase price, thus making my capital gain a lot lower. Example: I bought my Townhome for 369k and refi’d for 520k. When I sell for let’s say 750, is it capital gains tax starting from 369k or 520k? I’m also single.

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Jean Parke February 2, 2014 at 7:07 pm

capital gains are based on original purchase price + any capital improvements you have made to the home (additions, remodels, major improvements, etc.)

They have nothing to do with your mortgage amount.

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robert September 8, 2013 at 9:19 am

I am in the military and I bought my home in 2003, I lived the home until I received order to move 2007. It has been a rental since. It is now 2013 and I am considering selling the home. Do I meet any capital gains exclusion in this situation?

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robert September 8, 2013 at 9:14 am

I am in the military and I bought my home in 2003, lived in till I received order to move 2007. It is 2013 and I am considering selling the home. Do I meet any capital gains exclusion in this situation?

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JT August 21, 2013 at 2:31 pm

If I sell a rental property for a gain can I roll the gain to pay down the mortgage on my primary residence tax free?

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Bettye August 20, 2013 at 10:31 am

I have a Duplex in California and I live in one, but I am planning on selling it between 2014 to 2016. How can I keep more money for my retirement and pay less taxes? Thanks

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alex August 5, 2013 at 2:12 pm

just sold a rental property for gain
can I payoff existing mortgage on primary residence with this money and avoid tax liability in the process?

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Heidi July 7, 2013 at 8:05 pm

I have a question about inherited property that was and is rented. I want to sell it to make some of the money I received. It was valued at 86,000, but will sell for less. It has been only a few months (will be a year in Dec.) since I received the property, although it has been 3 years since the death. What do I need to do, what will I be hit with, and can I use the money to do additions to my personal home?

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Sherrie hicks July 7, 2013 at 2:27 pm

Hi,
We have owned a 1031 property for 7 years. It was purchased with funds from two other rental properties. We have 50% equity ($300,000 equity. $600,000 value) in the property and want to do some renovations ($60,000 in renovations) on the cabin.

Can we use our equity to do the renovations? If so, how do we access the money? Home equity loan? Stand alone loan?

How will this be taxed at the time of sale when we pay capital gains (no plans to sell the property).

Thank you for this resource!

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Crystal July 7, 2013 at 12:04 pm

I am currently selling a rental property. Can I convert my current primary residence (owned less than a year) to a rental and use the 1031 exchange if I buy a new primary residence?

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Peter Armour June 27, 2013 at 6:05 am

I have a rental property up for sale and I know I will pay Capitol Gains. I calculated Original Purchase price of $85,000 and selling for $115,000. $30,000 is my capitol gain but not sure if that is the tax I owe or is it a 15% tax on the $30,000.

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Amy September 9, 2013 at 5:04 pm

I am currently selling a rental property for gain.

Can I payoff existing mortgage on primary residence with this money and avoid tax liability in the process?I have had the rental home for 16 months. Please advise. ThANK YOU

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Peter June 20, 2013 at 5:22 pm

I moved out of my primary residence for a job out of state and eventually rented it but for less than my mortgage (its a loss for income purposes). I’m running up on the end of the 2 yr/5yr rule for the exemption. Although I’ll have capital gains by the Basis calculation, I won’t have much actual net gain when I sell. Other than selling the property now, is there a way to reduce capital gains if this is my only property and only significant investiment? I don’t plan on rolling any proceeds into a similar price house but probably lower price. And I don’t have opportunity to exchange as I don’t plan on being a landlord again. Thanks for any advice.

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Lucy June 6, 2013 at 8:08 am

If you have a cottage on your property (having lived in the main house for 27 years), now you want to move into the cottage and rent the main house.
How does the two out of five exclusion work? When you sell can you get your full exclusion or only a partial.

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karen May 26, 2013 at 6:37 pm

I have had a 4 unit multi family house where I’ve lived in the one unit for 13 years. I purchased another single family home that I was going to move into at that time, but then realized that I needed to rent out first to lessen my debt load so Ive rented that out for 3 years now. I’m currently selling the multi unit house that I’ve lived in for a very long time and will be moving into the other single family house that I’ve rented out so my question is……are there any capital gains tax exemptions for me having lived in the multi unit for so long…for my personal residence even tho 3/4ths was rental? I’m also learning that I may be paying a recapture on depreciation also of a hefty amount as well. Would the deferred sale trust be the way to go on this? Or do I just buck up and pay the piper? It would be nice to have some relief for this being my personal residence. What do you advise??

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jp June 4, 2013 at 7:24 am

Sounds like since you lived in the multi-unit dwelling 2 out of the last 5 years, the “status” of the property changes from Investment to Personal.

As such, the gain would be excluded up to $250,000 for single filer and $500K for joint.

The “essence” of the property is essentially Personal since you lived there 2 out of the last 5.

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Karen La point May 21, 2013 at 7:31 pm

My husband and I have dual primary residences. His job in Philadelphia, lives in our Downingtown, Pa, I was relocated to Tustin, Ca with my job and my daughter and i live in our Southern Ca home. We file jointed married. When we sell one of our home what happens with capital gains?

Please advise

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Kimberly Goodwater May 13, 2013 at 11:49 am

I was divorced a year ago and in my divorce papers it states that if my exhusband sells the property I am to get half. My question is did he find a loop hole in the paper work by renting the property out. If so what should I do?

Kimberly Goodwater

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Michelle April 26, 2013 at 5:33 pm

Hi Jason,

Thanks for the information–very helpful. I do have a question though. I have a rental house that I’m looking at moving back into (was my primary residence) after about 4 years of renting to satisfy the 2 of last 5 rule, then sell. I’m thinking of either selling my current residence (a condo) or renting it out for the couple of years while I live in my house, then basically sell both of them around the same time. I’m not interested in doing a 1031 exchange. I understand the last 2 out of 5 year rule, but read somewhere you can only do this on one property every 2 years. If I rent my condo would I then be subject to capital gains on it if I sell it in a couple of years, having lived here for three years prior? I guess my question is can I do this on both properties if I technically qualify for the 2 of last 5 year rule? Thanks!

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Tracy April 18, 2013 at 11:30 am

Hi. We built a house in 2005 and had to leave it due to job transfer. WE have rented it out since then, but at a loss every month! We just tried to keep it from going into foreclosure, but we continually lost money. WE now have someone interested in buying. Will we pay capital gains? I have all the receipts we paid to build the home (pre-rental income receipts) that total more than we are selling it for, but some of the receipts have faded. The person interested in purchasing is wanting to do a lease option and pay us money over three years to apply to the principal and wants us applying to our mortgage. Technically, that money is closing money, but if it is given two years or more before the closing do I have to count it as income now or just wait and count it when we do actually close?

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Debbie April 17, 2013 at 4:30 pm

I have a question about this gray area phrase that is used “The simplest way to avoid the capital gains tax, then, is to live in the home for at least two of the five years immediately preceding the sale.” What does that mean? Does that imply that you have to have lived in the home in the the IMMEDIATE two years before you sell it? We have owned the home for 15 years,and just starting renting it out. In a black in white answer, how long can we rent it without paying the capitol gains? We won’t have lived in it for the IMMEDIATE two years before the sale. But we will have lived in it for 2 of the 5 years that we owned it. Pls help with a simple answer that seems to have alot of gray area’s.

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Jason Van Steenwyk April 17, 2013 at 10:53 pm

Hello, Debbie, and thanks for writing! There are a couple of special situations where different rules apply, such as where the homeowner is active duty military. But for most folks, to qualify for the full capital gains exemption, you have to meet a two-pronged test, called the ‘ownership and use’ test. 1.) You have to have owned the home for two of the past five years, and 2.) You have to lived in the home for at least two of the five years immediately preceding the sale. There’s no requirement that it has to be the last two years. It can be any two years. Furthermore, you can’t have excluded the gain from the sale of another home in the previous two years. See http://www.irs.gov/publications/p523/ar02.html#en_US_2012_publink1000200713 All the best, and thanks for reading,

Jason

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Ruby April 15, 2013 at 6:23 pm

I’m almost past the two out of five year time-frame. If I sell to a friend at a very low price within time frame, and then later buy back from this friend, does the two out of five year time-frame start all over again?

In other words, if I miss this time=frame, then when I do sell, will I have to pay capital gains tax?
If my income is low, does that mean you do not have to pay capital gain tax? Thanks for your response

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Jason Van Steenwyk April 17, 2013 at 10:56 pm

Hello, Ruby…

Remember, there are two tests… you have to have lived in the home for two years of the last five, and you have to have owned the home for two of the past five years. The clock doesn’t ‘reset.’ The IRS looks at the five rolling years prior to the sale. Remember that you can’t exclude gains more than once every two years. Jason

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Aneil April 12, 2013 at 12:41 am

We bought a fourplex last year to live in and rent the others. In other words owner occupied. In the middle of the process we got a military order to move overseas for 3 years and we had to move after living there for 3 months.

We realized the property had gained some value and now we are planning on selling it. We intend to move back to this place when we go back to Washington. If I sell this house now, do I need to pay capital gains tax at 15 percent as a rental house? Or is there a military waiver?

Please email me your expert solution

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RANDY April 8, 2013 at 5:35 pm

I sold a rental and made 100k which I invested into another new rental property five years ago. If I sell my new rental and lose 50K do I owe any capital gains tax?

thanks,
Randy

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Regina March 22, 2013 at 10:34 pm

I am selling my rental property and buying another rental property that I would eventually like to live at. In order to not pay capital gains tax, how long must my new property be a rental before it becomes my primary residence ?

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Christine April 10, 2013 at 6:49 am

I have the same question. And using the 1031 helps but it limits the amount of time you have to find another property and we also have a lot of repair costs on the one we are selling that we would like to use some of the monies from the sale to pay for. Also what is the % to pay on capital gains? 5-15%. That is a big jump, I could do 5% but not the 15%.

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Debbie March 8, 2013 at 1:25 pm

I rented out my home for 7 years…. never lived there during the 7 years. Can I take the money and apply it to the mortgage of two rent houses I already have and not pay the capital gain tax?

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Jason Van Steenwyk March 8, 2013 at 5:20 pm

Hello, Debbie, and thanks for writing.

Doubtful. Under the Section 1031 like kind exchange rules, you have to EXCHANGE one rental property for another. Selling it and applying the proceeds to pay off homes you already own is not an exchange, just a sale.

To lower your capital gains tax, you can sell other assets that you’ve lost money on… thereby employing a “tax-loss harvesting” strategy (You can Google around on that term for more information) or simply execute a Section 1031 exchange. Or simply keep on renting and let your tenants pay the mortgages on the other two properties.

Have a great day!

Jason

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val martinez February 11, 2013 at 8:20 am

If a rental property is owned by 2 individual people, and 1 person has lived in the residence for 2 years out of the five preceding years PRIOR To the rental and 2 years out of the five preceding the sale of the property, is capital gains tax eliminated from both owners?

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Gabe February 25, 2013 at 1:40 pm

I have the same question.
And what if an owner has a renter while they are living there as their primary residence?
Anyone?

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Chuck vB December 4, 2012 at 4:04 pm

I have a house that was my primary for 15 years, but I had to move as I changed jobs. The problem was that the home is in Phoenix and the market has been (and still is so bad I had to rent the property. So now I’m past the two out of five year time-frame. But it was Job related. Will the IRS exemption on the 2 out of five year work in this case?

Thanks
Chuck

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mae pickens May 19, 2013 at 11:36 am

I’m in the same situation. Is there any forgivness from IRS do to job related transfer. Avoid paying the capital gain if I sale in Calif.. Otherwise, I’d have to move back into my rental in California for the next two years and rent my home in Nv.

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israel g. garcia November 13, 2012 at 10:21 am

bought new home how long can i rent old home without paying capital gains taxes

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CAROLYN B. KNOTT September 9, 2012 at 8:28 pm

I own a home that I’ve lived in for 16yrs; leaving due to the death of my husband and my own very serious health problems. I still own the home but I’ve rented it for a few weeks seasonally. Probably four weeks in 2012. I paid $226K. Now I can sell it for between $500K and $600K. I have done considerable work and repairs on the house in upkeep and preparation for either renting or selling – a new roof was installed 6yrs ago, I will have a sewer assessment of around $5K due – the realtor fees, painting throughout, carpet cleaning, etc. Where can I go for answers to my obligations? I am 82yrs old.

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Shannon O'Brien September 10, 2012 at 11:02 pm

Hi Carolyn,

It’s so nice to finally start hearing about homeowners with equity in their homes!

That said, I don’t understand what you’re looking for when you say “answers to my obligations.” If you can clarify that and let us know what questions you have we’d be happy to help.

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CAROLYN B. KNOTT September 11, 2012 at 3:06 pm

Shannon – 1. Do I still get the $250K credit, even though I have rented the house for a few weeks? I have not lived in the house for any part of the past 5yrs. Just a couple of months each year. It is impossible for me to move back to NC due to my declining health and inability to live alone. Many surgeries have left me with “foot drop” and neuropathy in my feet and legs. The continuing expenses make it financially tight, thus trying the rental route to help out.

We added a burglar alarm and boat life when we were building the house. We also added length and other amenities at a later date. I would guess about 5yrs after we moved in.

Do that answer your question? When you reply, please notify me at seaknott@gmail.com

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Jackson Lancaster April 2, 2012 at 9:13 am

People had better take advantage of all the tax benefits they can from their homes before they evaporate !

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