The 2 year rule on Rentals

[Lane Kawaoka]

If I bought a rental in 2009, rented it out a few years (and taken 30k in deductions for depreciation), then moved in and have lived there for the last two years do I have to pay any taxes on any appreciation if I sold now?

Info on 2 year rule: (However it does not mention if your rented it out previously to you living in it)

http://www.realtor.com/home-finance/homebuyer-information/understand-the-two-year-real-estate-resale-tax-rules.aspx?source=web

[Steven Hamilton II]

Originally posted by @Lane Kawaoka:

I would like to take profit and run. But if I have to pay taxes on the depriciated amount I will most likely do a 1031 exchange.

You WILL be subject to taxes on the depreciated amount.

How long have you owned it? You must own it for at least a total of 5 years to exclude ANY of the gain.

Property Converted from Investment to Primary Residence

Taxpayers used to be able to trade into a rental, rent the home for a while, move into it and then exclude all or some of the gain under Section 121. Provided they lived in the home as their primary residence for at least two years, they could sell it and exclude the gain under Section 121 up to the maximum level of $250,000/$500,000. In recent years Congress enacted two amendments to Section 121 in order to limit the benefits of Section 121 when the property has been used as a rental.

First, if you acquire property in a 1031 exchange and then convert it to your primary residence, you must own it at least five years before being eligible for the Section 121 exclusion.

Second, the amount of gain that you can exclude will be reduced to the extent that the house was used for something other than a primary residence during the period of ownership. The exclusion is reduced pro rata by comparing the number of years the property is used for non-primary residence purposes to the total number of years the property is owned by the taxpayer.

For example, a married couple uses a tax deferred exchange under Section 1031 to acquire a house as investment property. The couple rents the house for three years, and then moves into it and uses it as their primary residence for the next three years. The couple sells the property at the end of year 6, netting a total gain of $800,000. Instead of being able to exclude $500,000, the couple will not be able to exclude some of the gain based on how many years they rented the house. Since they rented it for three years out of six, 50% of the gain, or $400,000, will not be able to be excluded. Because of this new limitation, the couple will be able to exclude $400,000 of the gain rather than $500,000.

http://firstexchange.com/March2012Newsletter