Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
I am in a bind, a good one I guess.

I own a property for over 6 years that I feel will continue to appreciate 10's of thousands the next few years.

Under that assumption, I plan to rent it out.

It is well over 250K gain, and I guess I can wait to get married to qualify for the 500K exclusion, odd tax planning I know.

Other than that, anything I can do when I plan to sell? Suppose I have a million dollar gain? can I buy another property or some combination of transactions to mitigate the tax consequences?

Thanks

fool is so awesome
Print the post Back To Top
No. of Recommendations: 12
I am in a bind, a good one I guess.

Thanks for the afterthought. Without out it you would have been in for a tonguelashing that would put Judge Judy to shame.

I own a property for over 6 years that I feel will continue to appreciate 10's of thousands the next few years.

I'm not part of the Bubble Little group, but I do feel I should mention that one would be silly to assume that the recent runup in real estate prices is going to continue at the same pace. Like most old saws, "a bird in the hand..." has its truth.

Under that assumption, I plan to rent it out.

Speaking from experience, make sure you have the temperament to be a landlord. I had great tenants, but I wouldn't go through that again on a bet. YMMV.

It is well over 250K gain, and I guess I can wait to get married to qualify for the 500K exclusion, odd tax planning I know.

Not odd tax planning, but somewhat suspect in the romance category. "Darling, I can't live without your $250,000 capital gain exclusion; marry me" just doesn't bring a tear to my eye, but I'm a romantic old fool.

I'm having trouble figuring out your plan. Do you realize that Mr./Ms. Right would have to live there for 2 years before the sale for the happy couple to qualify for the $500K exclusion? Maybe you're planning on marrying your tenant? I've heard of worse bases for marriage.

Other than that, anything I can do when I plan to sell? Suppose I have a million dollar gain? can I buy another property or some combination of transactions to mitigate the tax consequences?

Here's where you're glad you mitigated. All you get is, "For God's sake, how greedy are you?" Paying only 15% tax on a capital gain while some poor schlub breaking his back to earn a living is paying much more should not be considered a burden. And no, after you walk away with $500,000 of tax-free income you have to pony up for tax on the rest.

Phil
Print the post Back To Top
No. of Recommendations: 1
I'm not a real estate expert, but after you move out of the house and rent it out for a while, it becomes rental/income property and not your home anymore. The $250K/$500K exclusion is only for your home. And I believe you had to have lived within the property within the last 2 years to get the exclusion at all.

If it does become a rental property then there's something called a 1031 exchange you can look into, which lets you put the money into another, bigger property and avoid taxes for the time being.

I don't know if there are any catches on home turned rental that wouldn't apply to normal rental rules, so consult an official guide or tax attorney before you even dare to act on anything :)

In addition to possibly not having the temperment to be a landlord (very few people do, IMHO), those properties which are greatest in value recently are those which probably don't rent for anywhere near what a mortgage would be. You may really want to consider selling, even with the 15% tax above $250K gain, you may be better off than losing money on a rental.

Finally, assuming that record real estate gains would continue, especially in markets where the cost of owning has dramatically outpaced that of renting, is not exactly a given. Unless you're a real estate expert, I would seriously consider doing what you need with real estate, and not playing games with it.
Print the post Back To Top
No. of Recommendations: 1
I'm not a real estate expert, but after you move out of the house and rent it out for a while, it becomes rental/income property and not your home anymore. The $250K/$500K exclusion is only for your home. And I believe you had to have lived within the property within the last 2 years to get the exclusion at all.

It's 2 years during the 5 year period preceding the sale. Details are in IRS Publication 523.

I didn't mention the 1031 exchange, which would defer taxation of the capital gain on sale of a rental as you note, because it sounded to me like the plan was to totally get out of the real estate business at the time of sale. This would be a viable alternative if OP wanted to continue in the landlord business.

Phil
Print the post Back To Top
No. of Recommendations: 0
...For God's sake, how greedy are you?" Paying only 15% tax on a capital gain while some poor schlub breaking his back to earn a living is paying much more should not be considered a burden...

IIRC, our Boston Tea Party and the subsequent Revolutionary War were due to the total tax being brought up to 1.5%. Today the average wage earner pays 40%. Including but not limited to taxes on income, property, sales, communication, transpiration, entertainment, logging, etc. etc.

TB
Print the post Back To Top
No. of Recommendations: 0
so should I look into selling my current home, and try to buy another just like it, as my area is great, and hope to gain another 250K in appreciation tax free that way?

Secondly, I've lived in it for 6 years. Can I now rent it for 3 years, then do a 1031, or does that make sense to?
Print the post Back To Top
No. of Recommendations: 1
I've lived in it for 6 years. Can I now rent it for 3 years, then do a 1031

Yes.

I'm not sure this board is the best place for your "should I?" questions. You'll probably get much more useful input on the investing board.

Phil
Print the post Back To Top
No. of Recommendations: 0
so should I look into selling my current home, and try to buy another just like it, as my area is great, and hope to gain another 250K in appreciation tax free that way?

Secondly, I've lived in it for 6 years. Can I now rent it for 3 years, then do a 1031, or does that make sense to?


If you sell your current home. you get to take the Sec 121 exclusion on $250K of the gain.

If you purchase another home, it DOES NOT have to cost more than what your current home sells for.

If you convert your home into a rental, as long as it is sold within 3 years, you could still take the exclusion on the first $250 profit, and pay capital gains on the depreciation you have to recapture (most likely, in your particular case, at the capped rate of 25%), and then pay cap gains on the balance, capped at 15%.

If you convert your property to rental property, that is business property, you'd have to weigh the tax consequences if you sold within 3 years as to whether you want to take advantage of the Sec 121 exclusion OR do a Sec 1031 like kind exchange. You can't do both at the same time.

No one has mentioned that a like kind exchange could involve multiple properties. So if you sell your rental for $750,000, you could buy more than one less expensive property to shelter and defer the gain on the sale of the single property, as long as you do not receive any boot (cash or other non like kind property)and you spend as much as you sell the property for.

Then, of course, you could move back into one of your rentals, live in it for at least 2 of the last 5 years and only pay tax on the depreciation you took in the past and any gain over the $250K exclusion.

You have lots of options. Lucky you.

Arleen
Print the post Back To Top
No. of Recommendations: 0
thank you very much!

I bought for 340K, it is now 800K, I have refi'ed into a higher first mortgage, and I also have a second. I want to keep the house, solely based on appreciation.

Seems like I sohuld rent for 3, and move back in, or sell then.

However, I am confused, if I rent for 5 after living in it for 5, do I pay LTCG on a 340K basis, no exclusion?
Print the post Back To Top
No. of Recommendations: 0
However, I am confused, if I rent for 5 after living in it for 5, do I pay LTCG on a 340K basis, no exclusion?

Yes (after adjusting the 340K for any capital improvements), plus (up to) 25% on any depreciation claimed or allowable during the rental years.

Ira
Print the post Back To Top
No. of Recommendations: 0
so it is not 'foolish' to sell if I haven't lived there in the past 3, I would lose 250K times 15% or $37,500? I should sell or move back in for a year?
Print the post Back To Top
No. of Recommendations: 2
so it is not 'foolish' to sell if I haven't lived there in the past 3, I would lose 250K times 15% or $37,500? I should sell or move back in for a year?

Beats me. I'm losing the train of thought in this exercise. I also don't see what moving back for a year does... you need two years of residence for the exclusion.

Ira
Print the post Back To Top
No. of Recommendations: 0
sorry, moving back would give me

5 years residence, 4 years rental, 1 year residence = qualifying for the 2 out of last 5 exclusion?
Print the post Back To Top
No. of Recommendations: 4
sorry, moving back would give me

5 years residence, 4 years rental, 1 year residence = qualifying for the 2 out of last 5 exclusion?


What are the last five years here? It is 1 year of residence and 4 years of rental. So you would not meet the 2 out of 5 years test and could not use the exclusion.

Basically, once you've lived in a house for 2 years and then move out, you have 3 years to sell it or move back in to preserve your section 121(g) exclusion.

--Peter
Print the post Back To Top
No. of Recommendations: 0
"5 years residence, 4 years rental, 1 year residence = qualifying for the 2 out of last 5 exclusion?"

I hope I am not angering the board :(

5 years as primary, then rent out for 3 years, then move back in for a year.

The way I am looking at this is that out of the last 5, the first year it was a primary, the next 3 as a rental, then the last year as a primary.

Yes?
Print the post Back To Top
No. of Recommendations: 1
"5 years residence, 4 years rental, 1 year residence = qualifying for the 2 out of last 5 exclusion?"

I hope I am not angering the board :(

5 years as primary, then rent out for 3 years, then move back in for a year.

The way I am looking at this is that out of the last 5, the first year it was a primary, the next 3 as a rental, then the last year as a primary.


HUH? If you rent for less than 3 years you can sell it without moving back in and still get the full exclusion. If you rent for more than 3 years, you have to move back in for a full two years.... even if your period of non-use is only 1 day more than 3 years. (You'll always have less than 2 years of primary residence usage until the first days of rental usage age out of the 5 year window.)

Ira
Print the post Back To Top
No. of Recommendations: 3
5 years as primary, then rent out for 3 years, then move back in for a year.

The way I am looking at this is that out of the last 5, the first year it was a primary, the next 3 as a rental, then the last year as a primary.

Yes?


Yes.

Don't make this harder than it is. It's really very simple.

On the date of sale, look back 5 years. Then answer two questions:
-During that 5 year time period, did you live in the house for at least 2 years (or 720 days)?
-During that 5 year time period, did you own the house for at least 2 years (or 720 days)?

If you can answer "yes" to both questions, you get the exclusion.

--Peter
Print the post Back To Top
No. of Recommendations: 1
at least 2 years (or 720 days),

Do you mean 720 days or 730 days?

- Megan
Print the post Back To Top
No. of Recommendations: 1
Do you mean 720 days or 730 days?

<grinning>
Isn't 365 times 2 equal to 720? <tapping on calculator>

Damn. <sounds of head banging on desk>

I hate it when I do that.

Yes. It's 730 days.

--Peter
Print the post Back To Top