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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121563  
Subject: Re: A REAL DILLY OF A QUESTION!! Date: 4/10/1999 12:37 AM
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[[I have owned my condo for 8 years. I would like to rent it out for 6-12 months
and then sell it. Will I have to pay capital gains when I sell it at that time?]]

Technically no..if you go by the strict interpretation of the law for the exclusion of gain on the sale of a personal residence.

[[ My
accountant sez YES unless I move back into it for 2 more years or leave it
vacant. This doesn't seem correct.]]

But if you convert your principal residence to a rental unti (which you are intending to do), then you MAY lose the benefit of the gain exclusion...which only applies to your principal residence.

The IRS rules and regulations on this are very, VERY unclear(at least in my opinion). In my practice, I am allowing clients in a similar situation to claim the gain exclusion, but I'm having them sign an "air tight" CYA letter in case the IRA makes a clarification to this issue.

The IRS NEVER intended this tax break to other than a personal residence. Converting the residence to a rental unit DOES jepordize your gain exclusion. But, it appears, that it is not fatal...at least not yet.

I'm hoping that IRS will issue additional regulations on this issue. Until then, I believe it to be a very very grey area.

[[ Does anyone know the law on this and if so
where would I find proof to show my accountant.]]

It's not a black and white thing. There is not one specific passage that you can show your accountant. It's a very grey area.

[[I have checked IRS
publicatons 523 and 527 but I don't see my particular situation listed.]]

Sadly, you are correct. Because this issue wasn't really addressed in the original legislation, IRS has carefully skirted the issue. So I'm afraid that all you can do is to show your accountant the rules regarding the gain exclusion, tell him that you will meet the 2/5 year exclusion rules, and have him take a strict interpretation of the law.

If he will not, your only option will be to find somebody that will. The problem is that in the next 12 months, after you convert to a rental unit, the IRS may come out with guidelines that will prove your accountant correct. It's just a crapshoot.

Your best bet is to sell the property while it's still your principal residence. That is the ONLY way (IMHO) to be sure that you'll receive the exclusion on the gain.

You can read my post on the gain exclusion in the Taxes FAQ area for some additional information.

TMF Taxes
Roy

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