Capital gains tax question here

10 Replies

Hello BP,

I will be selling a house that use to be my primary residence from 2009-2015.I am being made to sell to a railway company through eminent domain.The house became a rental from 2015 till date.

I was wondering if the proceeds of the sale would still be capital gains exempt since I lived there for 2 out of the last 4.5 years regardless that it is now a rental property?

Originally posted by @Ayo O. :

Hello BP,

I will be selling a house that use to be my primary residence from 2009-2015.I am being made to sell to a railway company through eminent domain.The house became a rental from 2015 till date.

I was wondering if the proceeds of the sale would still be capital gains exempt since I lived there for 2 out of the last 4.5 years regardless that it is now a rental property?

 If you had lived there 2 out of 5 years, you would qualify.  If you sell this December, you should have lived in the house in 2015 and 2016. You did not.


But not to worry. You can still defer (not avoid like a sec 121 two out of 5 year rule), through an involuntary conversion rule. 

If you invest the proceeds  within 2/3 years, the entire cap gain can be deferred. 

Updated almost 2 years ago

Talk to your tax professional about the involuntary conversion rule.

At the time you converted the property from your personal residence to an income property you should have filed a change in use with the IRS which would have established the cost base at the time of the conversion. Any capital gain would be calculated on the difference between the cost base and the current market value. I have had no experience with the involuntary conversion rule so I would definitely seek advice from a tax accountant. 

Originally posted by @Dennis Cosgrave :

At the time you converted the property from your personal residence to an income property you should have filed a change in use with the IRS which would have established the cost base at the time of the conversion. Any capital gain would be calculated on the difference between the cost base and the current market value. I have had no experience with the involuntary conversion rule so I would definitely seek advice from a tax accountant. 

 This is not true at all. 

You don't magically get a step up in basis because you converted to a rental. There's no form the IRS takes to do this. 

You need to tangibly SELL your primary to a corp to try to enact this type of situation and that's a fairly complex situation and recommend utilizing a tax pro to help. 

Originally posted by @Dennis Cosgrave :

At the time you converted the property from your personal residence to an income property you should have filed a change in use with the IRS which would have established the cost base at the time of the conversion. Any capital gain would be calculated on the difference between the cost base and the current market value. I have had no experience with the involuntary conversion rule so I would definitely seek advice from a tax accountant. 

 When you put a business asset in place it's done at the LOWER of cost or market. 

So if the property is worth more today (than when purchased) which is almost always the case it doesn't matter. 

You have to use the lower of the two figures. 

There's also no form to send in to the IRS for this. 

@Natalie Kolodij, my bad. The law was changed in 1997. However, if you made any improvements to the property while it was your personal residence you can add the cost of those improvements to the cost base. 

My bad. The law was changed in 1997. However, if you made any improvements to the property while it was your personal residence you can add the cost of those improvements to the cost base. 

Originally posted by @Dennis Cosgrave :

@Natalie Kolodij, my bad. The law was changed in 1997. However, if you made any improvements to the property while it was your personal residence you can add the cost of those improvements to the cost base. 

Yes but that wasn't brought up because he's covered under involuntary conversion.  

Originally posted by @Dennis Cosgrave :

At the time you converted the property from your personal residence to an income property you should have filed a change in use with the IRS which would have established the cost base at the time of the conversion. Any capital gain would be calculated on the difference between the cost base and the current market value. I have had no experience with the involuntary conversion rule so I would definitely seek advice from a tax accountant. 

 Can they go backwards and change this after the fact? Personal->income property

Originally posted by @Will F. :
Originally posted by @Dennis Cosgrave:

At the time you converted the property from your personal residence to an income property you should have filed a change in use with the IRS which would have established the cost base at the time of the conversion. Any capital gain would be calculated on the difference between the cost base and the current market value. I have had no experience with the involuntary conversion rule so I would definitely seek advice from a tax accountant. 

 Can they go backwards and change this after the fact? Personal->income property

He was wrong in saying this. There is no form to file to reclassify usage.