Hello again pam,
The problem here is that regardless of whether or not you actually move back in to the rental unit, you are still going to end up paying tax on most of your gain from this sale, even if you live there for 2 years.
As I explained earlier, the laws
regarding the exclusion you may claim on your primary residence were changed on January 1st of 2009. It used to be that you could exclude $250,000 from the gain on your primary home, as long as you had owned it for 2 years and lived there for 2 of the 5 years preceeding the sale. That is no longer the case. Under the new laws which went in to effect on 1/1/09, you still have to own the property for 2 years and you still have to live there for 2 years preceeding the sale, but you are no longer automatically allowed the full $250,000 exclusion. You are only allowed to exclude a percentage based on the number of years you actually lived there.
Your case is a little more difficult to figure, because part of the time you lived in one unit, and then part of the time you rented both units. So you would have to do a separate calculation for each unit. But basically you have owned this property for 26 years. You lived in one of the units until 1992, or for 9 years. For the remaining 17 years of ownership, both units were rented.
If you now move back in and live in one of the units for 2 years, then by that time you will have owned the property for 28 years and you would have lived in one of the units for a total of 11 years.
So your percentage of actual ownership use on that one unit would be 39%. The other unit was 100% rental.
So when you go to sell this property, half of the sale price attributable to the unit which was always rented, is totally subject to tax. The other half of the sale price you would be able to exclude 39% from the gain.
You also have to keep in mind that this property is now fairly close to being fully depreicated, or at least a good portion of it is. And you must reclaim that depreciation when you sell, regardless of whether or not you move back in to that property.
The botXXXXX XXXXXne is that if you do move back in to one of these units, then the longer you live there, the larger percentage you would be able to claim as a deduction
once you sell. But since one unit was always a rental, and since you will still have to recapture the depreciation you have claimed over the years, you would likely have to live there for quite some time before your exclusion amount was really anything significant.
That being the case, you should probably just make your decision based on whether or not you really want to spend any significant amount of time living in this property, because unless you do, it is not likely to make any significant change in your tax situation.
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Thank you pam.