Tax implications when I sell a property

12 Replies

Hi I have a property in San Jose California that I bought in 2011.  It was my primary residence until last year when a job took me out of state.  I still own the property but it is now a rental.  I have rented it out for one year.  I thought there may have been something that states if you live in a property for two years or more you get some kind of tax break?  I think now that its a rental house this may now not be the case?   Anyways I purchased the property for 388,000 and its now around 850,000.  Im thinking of selling it but wanted to know about the tax implications first.  Your feedback would be appreciated.

thanks

Ian

$250K exemption if you are single. $500K if you & your wife own the house.

Yes. IRS section 121 exclusion.....google.

Ian,

As was stated you get a $250,000 capital gains exclusion if you are single, and $500,000 exclusion if you are married if you sell your primary residence. The rule is you have to live in your home 2 out of the last 5 years of ownership for it to qualify as your primary residence, so renting it out is fine for a few years before you sell it. Check with a tax professional in case there are any quirks in your situation.

@Ian Russell

Looks like a good return for you, almost 462k in gain.  As mentioned above you do qualify for the  250 or 500k. 

if you are not married, you might have NIIT tax because you can only exclude 250k because of being single.  Any recognized gain on the sale of a principal residence is potentially subject to the 3.8% net investment income tax (3.8% NIIT), if your Modified AGI is above 200k. With your W-2 income, you might reach there so keep that in mind. 

If married, you might not go over assuming you are not high W-2 earner. ( if you are good for you man :) If you are married and are a high earner, the gain that you have to recognize under depreciation recapture(See Below) might trigger NIIT. 

When you converted your property to a rental last year, the FMV of the property must have been higher , around 800k, So, the depreciation that you took on the house (almost 29k ) will not be excluded under this 250k or 500k rule. You have to recognize the gain and will be taxed at 25% as Unrecaptured section 1250 gain on that 29k.

This is a small price to pay for such a good appreciation. 

Originally posted by @Ashish Acharya :

@Ian Russell

Looks like a good return for you, almost 462k in gain.  As mentioned above you do qualify for the  250 or 500k. 

if you are not married, you might have NIIT tax because you can only exclude 250k because of being single.  Any recognized gain on the sale of a principal residence is potentially subject to the 3.8% net investment income tax (3.8% NIIT), if your Modified AGI is above 200k. With your W-2 income, you might reach there so keep that in mind. 

If married, you might not go over assuming you are not high W-2 earner. ( if you are good for you man :) If you are married and are a high earner, the gain that you have to recognize under depreciation recapture(See Below) might trigger NIIT. 

When you converted your property to a rental last year, the FMV of the property must have been higher , around 800k, So, the depreciation that you took on the house (almost 29k ) will not be excluded under this 250k or 500k rule. You have to recognize the gain and will be taxed at 25% as Unrecaptured section 1250 gain on that 29k.

This is a small price to pay for such a good appreciation. 

I agree with alot of what Ashish has pointed out. However, the only thing to point out is that the depreciation basis on the property is lower of FMV and Cost when converting a personal residence to a rental property. Therefore the depreciation would not be $29,000.

@Ian Russell

Here is how your  "2 out of 5 years" rule works in your case:

After you move out, you have 3 years to safely rent the property and still be able to take advantage of the $250k/$500k exclusion on capital gain. 

Example: you sell this property for $950k in 2019, two years after you moved out. After Realtor commissions and other selling costs, you pocket $888k. This is $500k more that what you paid for it in 2011 (damn, I'm envious, this does not happen in Texas!) If you're married - your entire $500k gain is tax-free. If you're single - $250k is tax-free, and the other $250k is taxed. So hurry up and get married!

One complication, as already mentioned by my colleagues. Whatever depreciation you claim during these 2 years of renting, you will have to "recapture" - pay 25% tax on it. But it's not a tax penalty really. Just essentially not letting you benefit from temporary depreciation.

@Michael Plaks:  As @Ian Russel has converted this property to Investment Real Estate from his Personal Home - could He do a 1031 Sale and delay the Tax Implications of a Sale?  

@Jim Cummings , It's even better than that for @Ian Russell .  He can do a 1031 exchange because it is investment property and completely defer all tax and depreciation.  and He can take $250/$500K of boot which would normally be taxable.  But because he qualifies for the primary exemption he will get that tax free.  It's a total win!

This post has been removed.

@Ian Russell , I would suggest that you consider another, perhaps more complicated, idea: a combination Section 121 exclusion (generally for a residence lived in for two of the last five years) and a 1031 exchange for the remainder of the gain. This will allow you to potentially get up to $250,000 (if single) of the house gain without taxes and then to exchange the remainder of the gain into another investment property. This plan requires some planning, but can be a great option. I

Thanks for the great feedback lots of really good ideas.  We are married but only just recently and I am the only one on the title.  Do we both need to be on the title to qualify for the 500,000 non taxable amount?  Or does just being married suffice?

thanks

Ian

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here