Capital Gains tax on former residence

Buying & Selling Real Estate
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Capital Gains tax on former residence

Skai Bateman
Sharon, MA · Member since 2013 · 3 posts · 0 votes

Thanks for any advice. I know tax laws are changing right now, so I am unsure how much of a burden capital gains tax is going to be in 2013.

We are planning to sell a downtown condo that we own, that was our residence until 2009. In 2009 we moved to a suburb and it became a rental property. Since 4 years will have passed from the time we moved, we no longer can claim that it has been our residence for 2 out of the past 5 years.

With the capital gains expected, i am concerned about getting hit with AMT on top of everything else, and the new medicare tax of 3.8% (if we have over $250K income).

Is there any strategy for avoiding the capital gains tax? (we're not interested in a 1031 exchange and we can't move back in due to family size and location. But our jobs have not changed.) Is 1 out of the past 5 years a proportional reduction in taxes?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    What has been your use of the condo since you moved out? If you've been renting it, you will have tax on the unrecaptured depreciation, in addition to capital gains.

    Nope. You've eliminated the one way to defer (not avoid, just defer) the capital gains tax.

    You could sell it on an installment sale, which would spread out the capital gains tax payments.

    Nope

    Despite claims to the contrary, that 3.8% tax only comes into play for the portion of investment income over $250K.

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  • Skai Bateman
    OP
    Sharon, MA · Member since 2013 · 3 posts · 0 votes
    13y

    Thanks Jon, thats what i expected to hear, but that tip about the 3.8% only hitting the income over $250 is good to hear- i'm not going to make that much on the sale!

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  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    13y

    here's a queston I have most people are probably wondering:

    Is this person's purchase cost basis the price she bought as a homeowner or the cost when they began to rent it out.

    As we all know, the values have been dropping so to consider the cost basis at the time of renting sounds absurd to me.

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  • Skai Bateman
    OP
    Sharon, MA · Member since 2013 · 3 posts · 0 votes
    13y

    While we don't have that particular issue in our metropolitan area, we did hold off on selling until now because prices were not going up. It would have been nice if the tax code would make some sort of extension in the capital gains tax exemption for people like us who had to move out of their homes in the past few years but couldn't sell due to the economy. Like make the test 2 out of the past 7 years...

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    Steven Hamilton II would be able to be more specific, but I believe there are two different basis in a case like this. There is the costs basis, which is the price you paid plus any purchase costs plus any capital improvements less depreciation taken (or allowed, if you took less than was allowed.) When you sell, your net selling price is the sales price less costs for the sale. Gain is the new selling price less the basis. You first pay tax on the unrecaptured depreciation. That's limited to the amount of depreciation taken or allowed, whichever is greater. That tax rates is the same as your ordinary income rate, but is currently limited to 25%. If there is still gain left after the unrecaptured depreciation, that's subject to long term capital gains, currently 15%.

    However, as I understand it, the basis for deprecation is either the basis as described above or the fair market value on the date of conversion into a rental, if that's lower. Sounds like the FMV was higher than the basis from the regular calculation, so that's what you would use to calculate deprecation. After four years, you would have 7/27.5 (about 15%) of the original basis of the improvements (not land, if that's relevant, may not be for a condo) in depreciation that would subtract off your basis.

    Its unfortunate you didn't sell within the three year time limit. The tax code is what it is, so you're now stuck with the capital gains tax you could have avoided by selling a year earlier.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y
    Originally posted by Scott W.:
    here's a queston I have most people are probably wondering:

    Is this person's purchase cost basis the price she bought as a homeowner or the cost when they began to rent it out.

    As we all know, the values have been dropping so to consider the cost basis at the time of renting sounds absurd to me.

    The cost basis for rental depreciation can be different from the actual cost basis for the property at sale; the latter is basically "all" money that the owner put into the property (that is over-simplifying things). The cost basis for rental is based on the lesser of "all" money invested into the property or market value at time the property is put into service as a rental. Steven Hamilton II might be willing to visit this thread and offer his opinion ...

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  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    13y

    So so that everybody can understand this in a more simpler explanation:

    You buy in 2005 for $190k as owner occupied

    You put as a rental in 2008 & it's worth $170k now.

    Excluding all the tax talk, the original PURCHASE cost is $170k now not $190k?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    Scott W., no. The basis for computing depreciation during the rental period would be $170K. But that's not necessarily the basis when you sell.

    Come 2013 and you sell. If there is a gain, the basis is the original $190K basis, plus improvements, less the depreciation taken or allowed while it was a rental.

    If you sell at less than $170K, then you may have a deductible investment loss. That is, declines that occur while it was your residence aren't deductible, but declines that occur after the conversion are.

    I think, though I'm not certain, that if you sell at a price that is a loss vs. the normal basis (i.e.., price paid plus improvements less deprecation), that you won't have any taxable gain. You will only have a deductibe loss, though, if the loss comes with respect to the lower $170K value.

    Skai Bateman makes it sound like the price he can get now is higher than either basis, though. So there will be gain.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    13y
    Originally posted by Scott W.:
    here's a queston I have most people are probably wondering:

    Is this person's purchase cost basis the price she bought as a homeowner or the cost when they began to rent it out.

    The original cost basis is what they originally purchased it for. The adjusted cost basis is derived by subtracting the depreciation taken from the original cost basis (plus any capital improvements, if any). Neither changes based on a change in use.

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