Selling my rental. Have questions about the taxes!

9 Replies

Hi there, I'm fixing to sell my single family rental soon. I bought it with an FHA loan, lived in it one year and rented it there next year. I know if you own the house at least 2 years and sell it you don't have to pay taxes but what if I had a tenant in it one year? Does that matter? Any help is appreciated. Thanks!

"In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. " 

The above is directly from the IRS website. It sounds like you only used the property as your main home for 1 year and therefore wouldn't meet the criteria for the exclusion. 

@Vincent Herrera

If the unrealized appreciation is material, a 1031 exchange might be advantageous if you plan to reinvest the proceeds in rental real estate.

This is a calculus that takes into consideration the cost of professionals to help with a 1031 exchange vs the tax savings achieve through the tax deferral.  i.e. There is a cost benefit.

@Vincent Herrera , No you do not qualify for the exclusion, you could, however, move in for a year and meet the 2 out of 5 years requirement. Even if you do that, 33% of the gain will still be taxable because you rented the property for 33% of the time you owned it (1 out of 3 years). It is called non-qualified use. 

If you had lived in the property for two years and rented it out 3 years before selling, there wouldn't be any non-qualified use, and you would get the full exclusion. Hope that helps. 

@Vincent Herrera

Currently - you do not meet section 121 exclusion as you did not meet the criteria of owning and living in the property for 2 out of the last 5 years.

If you sell the property - your gain on the property is selling price less adjusted basis. Adjusted basis is purchase price less depreciation from the year it was used as a rental plus any improvements made to the house.

There may be other ways to avoid/defer paying the tax with either a 1031 exchange or putting the money in a qualified opportunity fund.

@Vincent Herrera . You don’t meet the requirements for the exclusion. You’ll pay long term capital gain taxes on any gain assuming you don’t do 1031 exchange. No tax advice given

@Vincent Herrera

RE Taxes is normally an operating expense and would be used to calculate your rental income for the year.

you would also do less adjusted basis(purchase price less accumulated depreciation).

You should consider hiring an accountant to do your taxes if you haven't already engaged one.

@Vincent Herrera unless your primary goal is to get some cash out of the property, I would suggest a 1031 exchange since you've converted it to a rental for a year. You can sell the property and replace it with another rental (or more, depending on how much value we're talking here) and defer CG and depreciation recapture taxes, basically keeping your tax dollars working for you. There are rules and regs I won't get into here, but again, unless you really need the cash, I would suggest doing some 1031 research. 

If you do need the cash, I'd move back in to qualify for the Sec 121 exemption.