Tax On Sale Of A Rental Home - Previously Main Residence
What would be tax situation on the sale of a home where we lived 10 years and then moved out 4 years ago during which time the property had been rented for 3 years? Can we avoid paying capital gains tax? It had gained about $100,000 since we bought the house 14 years ago. And since we moved out of the house, the property market value has declined about $60,000. (In other words, the property market value when we moved out and converted into rental property was anout $160,000 higher than the original purchase value.
Please be kind enough to share your knowledge on the tax situation.
If you have already sold the property, your sale is a taxable event. Your $100K profit will be taxed at the 15% capital gains rate AND depreciation you took or should have taken while your property was a rental will also be taxed at 25%
If you have not sold the property, you can only reclaim your eligibility for the capital gains exclusion on the sale of a primary residence by moving back into the property and occupying it as your primary residence for at least two years.
The property has been held as investment property for the last four years, so you would also qualify for a 1031 exchange if you are interested in exchanging into other investment property.
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Quote:To avoid taxes on this in the future, sell the property and 1031 exchange the proceeds into a like investment property (check with an account familiar with 1031 exchanges for rules). Rent the new property for a year and then move into the property. Then you can claim it as your primary residence, live there 2 years, and sell with the tax benefit. Make sure you sell the one you live in now and get the tax benefit on that house before you move into the new one.
estateXchange,
When your primary residence was originally acquired in a 1031 exchange, a different timeline is in effect to qualify for the capital gains exclusion.
In this case, the taxpayer must have owned the property at least five years and occupied the property as a primary residence for two of the five years prior to sale to qualify for the capital gains exclusion.
Dave T is absolutely correct - if the property is part of a 1031, it must be owned for 5 years to take 250/500k exclusion. This came into affect with the Tax Act at the end of 2004.