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Hi,
I'm thinking about renting out a single family residence for about 5 yrs and moving in myself, thus, becoming a personal residence.
Will there be any capital gains tax? Any other tax implication?

Thanks,
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I'm thinking about renting out a single family residence for about 5 yrs and moving in myself, thus, becoming a personal residence.
Will there be any capital gains tax? Any other tax implication?


We're a little sketchy on details here, but in general, while you have a rental property you report rental income and expenses on Schedule E of the 1040. There is no immediate tax consequence if you later move into the property. Once you finally dispose of the property depreciation during the rental period will be recovered at a higher rate than the other long-term gain on the sale.

See Pub 527 for more information.

Phil
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One positive implication will be that once you live in it as a personal residence for more than 2 years, you can sell it and get $250,000 in tax free capital gains. Wont that offset the higher depreciation recovery that Phil was talking about?

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One positive implication will be that once you live in it as a personal residence for more than 2 years, you can sell it and get $250,000 in tax free capital gains. Wont that offset the higher depreciation recovery that Phil was talking about?

It certainly softens the blow. If the 2 year requirement is met at the time of sale, all the gain not attributable to depreciation is available for the principal residence exclusion.

Phil
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Once you finally dispose of the property depreciation during the rental period will be recovered at a higher rate than the other long-term gain on the sale.

So the gain that's attributable to depreciation... how will it be taxed later? Capital gains tax, which is currently at 8% for long term capital gains (I think)? Of course, the rate can change later but for example purposes.
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sandflint:

<<<<Once you finally dispose of the property depreciation during the rental period will be recovered at a higher rate than the other long-term gain on the sale.>>>>

"So the gain that's attributable to depreciation... how will it be taxed later? Capital gains tax, which is currently at 8% for long term capital gains (I think)? Of course, the rate can change later but for example purposes."

IIRC, all recaptured depreciation is taxed at 25% under current rules. I am sure that one of the resident pros will correct me if I am wrong.

Regards, JAFO
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So the gain that's attributable to depreciation... how will it be taxed later? Capital gains tax, which is currently at 8% for long term capital gains (I think)? Of course, the rate can change later but for example purposes.

No, it's taxed as ordinary income, to a limit of a 25% rate.

Phil
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No, it's taxed as ordinary income, to a limit of a 25% rate.

1. True enough. But it's also wiped out by the sum of short term capital loss and long term capital loss carryover. At least that's the way it worked out for me, assuming I did it right...

2. Form 4797 and the Unrecaptured Section 1250 Gain Worksheet in the Sched D instructions have jumped to the top of my list of IRS nightmare forms, leaving the back of Sched D* a distant third.

Lorenzo

*The Sched D from a few years ago, when there were a zillion different tax rates, depending on, I don't know, the phase of the moon, maybe.
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