Question about a selling strategy to minimize taxes

Rental Property Investor · Northern Virginia · Member since 2019 · 793 posts · 620 votes

5y

@Rob King I am not an accountant, but did use this strategy. If you occupy a residence for two of the last five years (or just two years if you've owned it less than five years) then you can sell it without having to pay capital gains taxes on the sale up to $250k if single and $500k if married. However, from my understanding you can only use this strategy once every two years. So you can sell your first home and get the exclusion, then you'd have to wait two years to sell the next home but you have to also make sure you've lived in it for two of the last five years at the time of sale. The two years do not need to be consecutive.

Remember also that you can add any capital improvements to the cost basis of the property. So if you purchase the property for $500k and put in $20k of work, then your cost basis will be $520k which is what you will use to calculate the gains on the sale.

Best of luck!

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Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

5y

You can only do it once every 2 years. And for the full cap gains exemption, you had to live in it the First 2 years, and sell within 3 years of it becoming a rental. If a rental first, then the exemption is pro rated.

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Bob NortonPro Member

Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes

5y

@Rob King You could your rental for the full exemption and would pay tax on any depreciation recapture. You'd have to live in your current residence until you met the 2 year mark (+ 1 day) and then you could rent it out until two years had passed from selling the first property. Then, you would get the full exemption on that property ad would pay tax on any depreciation recapture.

If you wanted to sell both within a short time of each other, then I would recommend living in your current property until January like you plan and sell it for the full exemption. Then do a 1031 exchange on your rental to defer that gain.

3 Reply

Alex Olson

Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes

5y

Originally posted by @Rob King:

Good evening,
I have three properties in Honolulu, HI and am looking to sell two in the next 12 months. My understanding is that if you live in a property for two of the last five years you are protected against capital gains to a certain extent. I have lived in my current property for 16 months and would like to sell in January. The property I would move into was my home for two years prior to occupying my current residence which I would then also turn around and sell. I believe this would allow me to sell these two properties in a short time window without suffering tax penalties to then move into my third property while using the capital gained to move into an out-of-state market.

Has anyone used a similar strategy and, if so, were there any lessons learned you would care to share?

Thanks in advance for any assistance, prior to fully committing I will speak with a RE tax professional but also wanted to see what the large BP communities insights may be. Have a great one and aloha.

If you want the simplest strategy, a 1031 exchange may be the best way to go. However, the owner occupied benefits, assuming you don't break the threshold of capital gains on your owner occupied property are great. The 1031 exchange benefits have no maximum gains that you can transfer to another property sale. Hope this helps!

2 Reply

Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

5y

@Rob King, Great suggestion by @Bob Norton to switch the sales so you can get the full exception (other than depreciation on both of them. But you'll have to wait two years in between each sale.

Or you could take @Wayne Brooks suggestion and you'll sell the first one with full exception and prorate the gain in the second one between the time you lived in it and when it was used for a rental.

In any case you'll have to wait two years in between if you want to take advantage of the primary residence exception on both.

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Sean RossPro Member

1031 Exchange Qualified Intermediary · Denver, CO · Member since 2017 · 174 posts · 96 votes

5y

@Rob King, here are three important points:

Your section 121 homeowners exemption will exclude up to $250K in capital gains ($500K for joint filers). You can only claim this exemption once every two years.
If you do use the 121 exemption on a property that has been used as a rental for a period, the exclusion you receive is pro rated allocable to the years you claimed it as a primary residence.
You never exclude the recaptured depreciation taxes if you sell a property that was a rental for a while, even if you are using section 121

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Rob King

OP

Honolulu, HI · Member since 2019 · 40 posts · 33 votes

5y

To everyone who responded thank you very much, I appreciate your time as well as your insight. In 24 hours I learned several key points thanks to this community!

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Question about a selling strategy to minimize taxes

Question about a selling strategy to minimize taxes

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