Capital Gains on a Rental? (CPA's please chime in!)

Tax, SDIRAs & Cost Segregation
9yFollow

Capital Gains on a Rental? (CPA's please chime in!)

Doug Vigliano
Specialist · Austin, TX · Member since 2015 · 56 posts · 46 votes

So I bought a house in June 2015 in Orlando, FL 

I currently have it rented out with an option to purchase, they tenant-buyers put down a fairly large option fee and are self-employed, the deal should close in 2019

I have since moved to Texas and am renting a house.  Since I didn't buy a new house, this is the only "mortgage" on my credit.  

My question is when it closes, will I have to pay capital gains since this is technically my primary residence? 

I guess my question is what qualifies as a primary residence? Just because I've moved if I don't own anything else, does that qualify?

0Reply
13 views

Most Popular Reply

Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y

Can you clarify your question?

Was this property ever your primary?  Like, back in June 2015?  Or did you buy it with the intent to rent it?

If it was your primary, then you will not pay capital gain taxes on it if it was your primary residence in 2 of the prior 5 years of the date title transfers out of your name.  Doesn't sound like you're going to qualify for this since we are not yet 2 full years from that date, but perhaps you're close.

You will have to pay Depreciation Recapture though, so be prepared for that.

If this was never your primary, then you will be paying Capital Gains and Depreciation Recapture.

Note that just because this is your only mortgage, that does not mean that this is your primary.  Primary residence has nothing to do with how many mortgage you have.

Podcast Guest on Show #244
2Reply
See this reply in the discussion

10 Replies

Jump to latestLatest
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    9y

    Doug, 

    You PR will qualify for $250k ( $500k if Married) gain exclusion if all following requirements are met:

    • You owned a home and used it as your main home during at least 2 of the last 5 years before the date of the sale. (This 2 years does not have to be single block of the time so, if you have not met this whole 2 years, it might be an option to make it your main home before you close so that you meet the 2 year requirement)
    • You did not claim any exclusion during last 2 years. 
    • You did not acquire the house with Like Kind exchange during last five years. 

    If you meet the requirement, you do not have to pay any tax on sale of your house. You can still qualify for the exclusion even if you do not meet one of the criteria. Talk to your CPA about those. 

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD™ | AI-Powered Tax Planning
    WebsiteView Page
    0Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    Can you clarify your question?

    Was this property ever your primary?  Like, back in June 2015?  Or did you buy it with the intent to rent it?

    If it was your primary, then you will not pay capital gain taxes on it if it was your primary residence in 2 of the prior 5 years of the date title transfers out of your name.  Doesn't sound like you're going to qualify for this since we are not yet 2 full years from that date, but perhaps you're close.

    You will have to pay Depreciation Recapture though, so be prepared for that.

    If this was never your primary, then you will be paying Capital Gains and Depreciation Recapture.

    Note that just because this is your only mortgage, that does not mean that this is your primary.  Primary residence has nothing to do with how many mortgage you have.

    Podcast Guest on Show #244
    2Reply
  • Chris Masons
    Investor · Union, NJ · Member since 2011 · 838 posts · 295 votes
    9y

    Linda pretty much nailed it here....  I work for a National CPA firm as a Sys Admin and I constantly ask my Tax Department for advice and what Linda says echos what I was told pretty much exactly...

    Only way around this would be perhaps a 1031 exchange but this may not even work as it is not a straight sale but a lease option to buy which greatly complicates things as there are strict time lines to adhere to with a 1031 exchange...

    regards,

    Chris

    0Reply
  • Justin Stamper
    Investor · Orlando, FL · Member since 2012 · 822 posts · 303 votes
    9y

    How would he prove/anyone disprove he was living there for 2 years?

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Justin Stamper nailed it.  I don't think you'll qualify for the 121 exemption.  But you'll still have the option to 1031 which is tax deferred but not tax free.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Hi @Doug Vigliano, 

    You must actually live there in order to qualify as a primary residence. @Linda Weygant Is right on the money. It sounds like this has actually been a rental property, so it would qualify for 1031 Exchange treatment should you decide to sell and reinvest in another rental property. 

    @Justin Stamper, 

    There are many ways that an auditor can discover whether you have lived there or not.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
    0Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    Yes, the IRS will not prove that you didn't live there (unless it's quite obvious) and if they are going down this road, you are already in a world of crap.  Instead, it requires you to prove it was your primary.  You could do so with:

    Voter Records

    Vehicle Registration Records

    Driver's License Records

    Utility Bills (would need to be corroborated - not good enough by itself)

    Other bills with that mailing address (again, not good enough by itself, but would be considered "additional proof" if it were needed.)

    Insurance Records

    Podcast Guest on Show #244
    1Reply
  • Chris Purcell
    Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes
    9y

    @Dave Foster

    Claiming rental income doesn't prove you weren't living there....

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Chris Purcell, Yep that's true, but, a schedule E with income on it will be questioned in an audit situation when there has also been a 121 exemption on the same address . Now they've claimed to have met the 121 requirements and have to answer directly.  As @Linda Weygant said, at that point they are in a world of crap.  

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Chris Purcell
    Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes
    9y

    @Dave Foster

    I was under the assumption he lived there.  You can definitely have rental income and have it be your primary residence (house hacking)

    @Doug Vigliano

    Please read the tax rules that @Ashish Acharya posted, and file your taxes accordingly.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free