Capital gains question

8 Replies

I am trying to figure out if I would have to pay Capital Gains on a house. The house when's our primary home and then we rented it out for three years before moving back. So we have lived in the House 2 out of the last five years but they are not consecutive. Can anybody help me out with being able to definitively figure out if we can sell this house without capital gains or not? I would appreciate any insights or input you have. Thank you very much

Originally posted by @Brett Palmer:

I am trying to figure out if I would have to pay Capital Gains on a house. The house when's our primary home and then we rented it out for three years before moving back. So we have lived in the House 2 out of the last five years but they are not consecutive. Can anybody help me out with being able to definitively figure out if we can sell this house without capital gains or not? I would appreciate any insights or input you have. Thank you very much

 Since you moved in after the house was rental, there is something called Periods of Nonqualified Use. Gain on the nonqualified use is not excludable under that 500k exclusion.

Simple example

You bought a home on January 1, 2010, for $200,000. On January 1, 2011, you convert the property into your rental, then you move back on Jan1 2014 where you live until you sell the home on January 1, 2016, for $350,000. Your total ownership period is six years (2012-2017). However, the years 2012-2014 are a period of nonqualified use since the home was not principal residence during those years

Period of nonqualified use3 years
Total ownership period6 years
Total gain($350,000 − $200,000)$150,000
Nonexcludable gain(3/6 × $150,000)75,000

You must report a $75,000 gain for non-qualified use.

The remaining $75,000 ($150,000 − $75,000) of gain can be excluded under 500k exclusion because you meet the two-year ownership and use tests for the home and has not excluded another gain in the previous two years. However, you have to recapture depreciation that you took while renting out.

@Ashish Acharya

Is there a safe harbor or something of the sort that allows one to fully utilize the $500k exclusion while still turning the property into a rental at some point?

From a tax perspective what would be a smarter way to turn a primary residence into a rental and utilize as much of the $500k as possible?

Originally posted by @Joshua Thompson :

@Ashish Acharya

Is there a safe harbor or something of the sort that allows one to fully utilize the $500k exclusion while still turning the property into a rental at some point?

From a tax perspective what would be a smarter way to turn a primary residence into a rental and utilize as much of the $500k as possible?

Move out, convert into a rental for no more than 3 years, and sell tax-free. Almost tax-free, actually: will have to recapture depreciation taken over 3 years.

The key is to not move back.

There're some complex ways to extend it past the 3 years, but that would require professional help. 

Originally posted by @Joshua Thompson :

@Michael Plaks

So the nonqualified use only comes into play if you move back into the property? 

I would not phrase it this way. Rather, you have an exception to the non-qualified use rule if you sell within 3 years of moving out.

Originally posted by @Michael Plaks :
Originally posted by @Joshua Thompson:

@Michael Plaks

So the nonqualified use only comes into play if you move back into the property? 

I would not phrase it this way. Rather, you have an exception to the non-qualified use rule if you sell within 3 years of moving out.

 Is there a section I could find this exception? I don't want to keep boggling you down with questions.

Thank you Michael!