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Is it best to sell now while the house is considered my second home, or rent it for two more years and sell it as rental property?


If you're looking at a gain, it will make no difference - the gain will be taxed either way. However, if you will have a loss on the sale, you want the property to be a rental, not a second residence. That's because a loss on a second residence would not be deductible.

Remember, it will be the facts of the situation that dictate whether the house is a second residence or a rental. So you want as many facts as you can get to support a rental. Renting the house again after your MIL moves will certainly help support considering it a rental. And the longer you rent it out the better.

Finally, remember to consider the financial situation in addition to the taxes. If your crystal ball says the property is going to go down in value over the next couple of years, you may be better off selling now even if you don't get a tax benefit. You could lose more in the real estate investment than you would save in taxes. The only way to know is to run a couple of "what if" situations, then make your decision with that knowledge.

Good luck with your decisions.

--Peter
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