Selling My Home
in 1992 my wife and i purchased a condo that we lived in for 5 years and then moved. the last 6 years we have rented it out. we paid 79000 for it and are listing it at 189000. does anyoneknow the tax implications that go along with us selling at this time. we need help due to the fact that everyone we know says something different about capital gains. any help would be appreciated.
thanks in advance
david
If you have lived in a home for more than 2 years, the first $250,000 of profit is tax free. That's right! You dont have to buy a more expensive house to avoid the taxes anymore.
This is an absolute fact.
The only thing clouding this issue is that you rented it for the last 5 years. I dont think it matters because it was a residence and you have owned it for 10 years and you clearly dont have "dealer" status.
But why dont you ask an accountant so that you can avoid the confusion you will have when you get multiple different answers.
IMO, you are in the clear.
Neill
i,m hoping thats the case, but what about the line that says you have to have lived there for 2 out of the the last 5 years. thanks for the response, if anyone else knows any more please help.
Sorry David,
Neill7 gave you incorrect information. Because you have used your former primary residence as a rental for the past six years, your property is now an investment property and no longer eligible for the capital gains exclusion on the sale of your primary residence.
The profit on the sale of your property is subject to long term capital gains taxes. If you sell now, your maximum (long term) capital gains tax rate is 15%, while depreciation recapture is still 25%.
If you are interested in doing a tax-deferred exchange, you postpone your tax bill until your replacement investment property is sold -- sell now, pay later.
As an alternative, sell your present primary residence (assuming you have met the 2 year ownership and occupancy rules) and exclude your profits from capital gains taxes. Move into your rental property for two years and establish it as your primary residence. Now when you sell this property, you once again qualify for the capital gains exclusion (up to $250K per taxpayer). You will still have depreciation recapture to pay, but that should be minimal when compared to the total profit.
If everyone you know is giving you conflicting advice, it is best to seek assistance from a tax professional on the specific details.[ Edited by DaveT on Date 07/26/2003 ]
davet
thankyou for clearing that up for us. if at all possible could you explain how that 25% depreciation works and go a little deeper into the tax deferred exchange.
thanks again for all your help
your responses are greatly appreciated
david
davidpatrick,
Check out this article How Depreciation is Recaptured.
Then check out this overview: The 1031 Exchange Process in a Nutshell.
If you still have questions, come back to this forum, and post them in a new topic.
wow, I am sorry.
I hate giving people false hope.
I hedged a little bit, but I really thought you were in the clear.
Dave T has a great suggestion though, I hope its a workable solution for you.
Good Luck.
davet, thanks for the info. but how do we figure what the true value is now for depreciation recapture?
True value of... your property???
Whatever your property sells for is its "true" value. Your sales price minus your selling expenses minus your settlement costs yields your NET proceeds.
Let's say that you accept the best offer you receive for your property, $180K with $2000 closing cost assistance. Your sales commission on this deal is $10800 and your share of the closing costs come to $1200. This means that you net $166K from the sale (180K - 2000 - 1200 -10800). For your tax calculations, use $166K (the net proceeds) as your sale price.
You should be able to follow case 1 in the depreciation article, substituting your own numbers to compute your potential tax liability. Remember that your new long term capital gains tax rate is now 15%, while depreciation recapture remains unchanged at 25%.
thankyou again davet, but excuse me for being ignorant on this matter; but i think i have this part figured out. it's the part obtaining to depreciation recapture numbers where i'm lost. in the article they showed some numbers where the homes were for example less than what they were purchased for (purchased for 80000 and after depreciation recapture is now 70000) so i guess my real question is how do we figure out the depreciation number where its less than what we purchased for?
thankyou again
david & kim
How much depreciation have you actually taken since you converted your condo into a rental?
If your depreciation basis was 79K and you used the IRS straight line depreciation schedules, then you should have taken approximately $17000 in depreciation over the past six years. Go back through your prior year's tax returns to add up your total depreciation expense. If you did not take any, or you took too little, then use the IRS depreciation schedules to calculate how much you should have taken.
Since you are selling your property for more than your original purchase price, all your allowed depreciation will be recaptured at 25%. If you did not take any depreciation, then the amount of depreciation you should have taken will be recaptured at 25%. If you took more than you were allowed, then the excess will be recaptured at your ordinary income tax rates.
Everything over your original purchase price, is taxed as a long term capital gain (maximum rate is 15%).
The general formula for your tax is:
Tax = (25% x depreciation) + (15% x profit from appreciation)
Using our example numbers, this translates to:
Tax = (25% x $17000) + (15% x ($166K - $79K))
Tax = $4250 + $13050 = $17300