How Long Do I Have To Live In Rental For.....

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I have a rental property. I was thinking of selling my personal residence and then moving into the rental property. What happens if (after living in the rental property for about 1 year) I want to move? Do I still have to trade the rental for like-kind exchange?? Also, while I am living in the rental property, and I'm not paying myself rent to live there, do I claim income on the property. Any advice? Thanks
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Comments(2)

  • Sandbahr16th January, 2004

    The rule for exemption from gains is this.... You must have lived in the property for at least two of the last five years. So, if you want to pay no gains you will have to live there for two years. If you only live there for one year I believe that you would still be able to do the 1031 exchange. If you want to avoid the 1031 exchange and gains you will have to stay there for two years. During that time you don't claim any income because you are not a renter. Just keep in mind though that when you do sell the property even after living there for two years you will have to pay back the depreciation credit that you recieved during the years that you rented it out. That's the best answer I have. Maybe others have more info.

  • DaveT17th January, 2004

    saby,

    If you convert your rental property into your primary residence, you must occupy the property as your primary residence for two years to qualify for the capital gains tax exclusion. Your two years of occupancy can be any two of the five years prior to the sale.

    For example, if you occupied the property as your primary residence in your first year of ownership and your fourth year of ownership you still qualify for the capital gains exclusion on the sale of your primary residence. Even though you may have used the property as a rental during the two intervening years, you retain primary residence status for the sale of your property.

    The general rule is that the property must be both OWNED and OCCUPIED as your primary residence for two of the five years prior to the sale to qualify for this tax treatment. The periods of ownership and occupancy do not have to be concurrent, nor do they have to be consequetive.

    If you choose to only occupy your former rental for one year, and you still do not qualify for the capital gains tax exclusion, your sale will be subject to long term capital gains tax treatment. Using a 1031 exchange to defer capital gains is not available to you when your primary residence is involved.

    Once you convert your former rental property to your primary residence, your property is no longer a rental. You do not report any income or expenses on your Schedule E for this property because you no longer have the property in service as a rental.

    Instead, you take your normal mortgage interest and property tax deductions on Schedule A if you itemize your deductions. All other expenses of ownership are personal expenses for your primary residence and are not deductible.[ Edited by DaveT on Date 01/17/2004 ]

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