Tax Ramifications... Need advice

7 Replies

So I have a primary residence that I am converting to a rental so that we can purchase another primary.  What kinds of tax ramifications will I see if I sell the property?  Is there a timeframe where its better or worse to make that decision? 

I understand that I am taxed on my cash flow as income and that I can use depreciation and certain expenses to my benefit but I am by no means a tax expert.  Suggest speaking to a real estate attorney?

Thanks,

Speak to a CPA.  But, if you lived in it as your primary for at least 2 of the last 5 years when you sell, the gain is tax free.  You'll have a little recapture tax for the depreciation during the rental period though.

Talk to a CPA who specializes (or at least is recommended by local RE investors. 

There is a tax exemption on gains up to a certain value (maybe $500k) on selling a personal residence. And you can still use the exemption as long as you lived in the house for 2 of the last 5 years. So essentially you can rent it for 2+ years and then sell with no tax on cap gain. 

Yes.

@Ian McDonald

I JUST posted this in another topic:

I think one of the most common and yet biggest mistake people make is that they rent out their personal residence after they've lived in it. The IRS already offers capital gain exclusion of up to $500K for married filing jointly. You can rent it out for up to 3 years and still qualify for the exclusion. Essentially, for most people this will cover any capital gains in the sale of the primary residence (forget the 1031!).  You'd like have to pay depreciation recapture x3 years if you do rent it out.

If you decide to rent longer than those 3 years, do you think the house will appreciate where the capital gain component is >15% (not the whole house, but just the capital gain component). Gaining 15% only puts you at net even! Even if you think the house will appreciate (capital gain component) say 25%, of which you pay 15% in federal tax leaving a net of 10%....this is still a pretty bad investment (IRR of 3.22%).

Better to just take your capital gain tax free and invest that money elsewhere.

@Daniel Chang

I can understand that and thanks for the explanation. What I am dealing with is deciding what is the lesser of two options. I can purchase a new primary residence and rent my current one out for around $600 cash flow/month which would also allow me to use a FHA loan with 3.5% down to keep more capital in the game for further investment properties.

If I decide not to do that I would be purchasing an investment property straight out which would require 20% (at least) of my capital as money down.  This may put the brakes on ability to expand (maybe not). 

Is it better to rent out my current residence to leave more capital in the game for purchasing additional investment properties while paying the possible capital gains/depreciation recapture later down the road?  Or is it better to stay where I am at and only invest in smart investment properties at 20%+ down but have less free money to invest in new properties that could possibly net me the difference anyways?

Thanks

You don't have to take the depreciation on your taxes in the mean time though I you think you might sell within the 5 years. I'm renting out our first house currently. Only lived in it just over a year, so I k ow if I want to sell it I will have to either move back in, or try to 1031 it into something else.

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