Hi guys. I have lurked for a bit but have never posted. I want say thank you for all the great information you provide!! I have done 2 house hacks in the past and now looking to start purchasing multi family. My question is: I am selling my SFH that I lived in for almost 3 years and rented out for this last year. When I sell that property will I have to pay income taxes on my gain? From what I have read I shouldn't be subject to Capitol gain tax because I have lived there more than 2 years. But, will they consider that "gain money" as income on my taxes? Any info would be much appreciated. I will most likely roll that money into a multi family but would like to pay some other things off with some of it.
@Mark Roberts - You're referring to the "2 of the last 5" rule, which you seem to understand correctly. You won't be subjected to capital gains taxes on the increase in value of your property.
A little tax theory here to help understand: There are many different types of income, and many ways those types are taxed. For instance, you have ordinary income (income from performing a service like flipping a home, selling inventory, or working a W-2 job). These are subjected to income taxes and social security + medicare taxes.
There is also capital gains (and many more). This is the increase in value of capital invested, and is taxed at the capital gains rates (assuming it's long term capital gains).
So to answer your question, the gain on your house that you've lived in for at least 2 of the last 5 years is a capital gain, but it won't be subjected to capital gains taxes because of the "2 of the last 5" rule.
I will point out that you should (and probably have) taken depreciation on your house the last year you didn't live in it. You enjoyed a tax benefit because of that depreciation. When you sell the house, the government is going to make you pay back that benefit in the form of "depreciation recapture". The amount you took in depreciation will most likely be taxed at 25%.
Finally, you mentioned rolling money into another home- I'd look up "1031 Exchanges" on this forum, because if you plan on rolling money from deal to deal, it may help you defer the capital gains taxes in the future.
@Alan Rohrer Thank you for the clarification on that! I really appreciate it.