Homestead Exemption Law

10 Replies

I'm looking for someone who can clarify the homestead exemption act for me. As i understand it today, I can sell a house that I've lived in 2 of the last 5 years and not pay capital gains tax on that. So I did that, last September. I own another house that i will have lived in for 2 years this next upcoming September. What i'm trying to understand is, how often can i take advantage of this exemption? So if it will have been a year since i sold the last property, can i take the exemption again this upcoming September or do i have to wait longer? If so, how long do i need to wait?

I believe read that if you claimed rental income on it, you can't use the homestead exemption. Can someone confirm? 

I know, I know, you aren't giving me legal advice, consult a CPA, blah blah lol

I'll dig through some of the IRS codes myself later but I'm sure there's someone here with more knwoledge that can point us in the right direction faster. 

If you live in for at least two years, Then turn it into a rental and sell within 3 years (2 of the last 5) your section 121 exemption is still in full effect. If it is rental First, then there is non qualifying use pro rats calculation.
In either case you will have some depreciation recapture tax due for the depreciation during the rental period, whether or not you actually claimed it.

So there is something called a Homestead exemption - that usually has to do with property taxes being lower for owner occupants than for landlords.

Then there is the IRS Section 121 exclusion, which allows people to sell a house that they lived in for two out of past five years with 250K (500K if married and jointly owned) of capital gains being excluded from capital gains tax.

Which of these is your post about, @Jeremy Clarke ?

Selling your primary residence is the proper term as homestead exemption is a state term that may reduce your property taxes in some states

As mentioned before, if you have lived in your primary residence for 2 out of the last 5 years, your first $250,000 if single or $500,000 if married is exempt from capital gains tax

@Kevin Phu That is incorrect.  The property can be used as a rental during the 2 out of 5 requirement but you will have to recapture depreciation

@Steve Babiak , i got ahead of myself with the title of this post. I am referring to the IRS capital gains exclusion and how often i can take advantage of that. I sounds like once every two years. I sold a property last September that qualified and once i hit this upcoming September i will have another property that qualifies, but it sounds like i will have to wait a year to take advantage. 

Thanks @Wayne Brooks . Depreciation Recapture is a FIVE letter word. I went through that this past tax season and owed. However you made an interesting comment. You said quote, "In either case you will have some depreciation recapture tax due for the depreciation during the rental period, whether or not you actually claimed it." I find it interesting. So you are saying that if i choose not to depreciate my home while renters are in it, i will still have to pay the recapture tax while they lived there? I am asking because some people where i live aren't claiming depreciation to avoid the recapture tax because property values are in fact rising significantly year over year. 

@Jeremy Clarke my understanding is that you still have to pay the recapture tax even if you did not depreciate unless you 1031 exchange. If you missed claiming depreciation, then your missing out on a benefit that you should have taken.

https://www.biggerpockets.com/renewsblog/2014/07/31/four-depreciation-tax-mistakes-investors-need-avoid/

@Sung Park is correct - if you do not take the depreciation deduction when you were eligible to, you are still subjected to the depreciation recapture of the amounts you were supposed to have deducted. So take that depreciation deduction. 

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