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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 15587
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I have a single family house that I have rented to tourists

Resolved Question:

I have a single family house that I have rented to tourists for many years. It is almost fully depreciated now. I am trying to avoid paying a large tax when I sell the house in a few years. If I move into it and use it as my primary residence for at least 2 years, would that alleviate the capital gains tax. Are there other options that would be practical?
Thanks
Larry
Submitted: 1 year ago.
Category: Tax
Expert:  Megan C replied 1 year ago.

MyVirtualCPA :

Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

MyVirtualCPA :

Hi, Larry

MyVirtualCPA :

You would be exempt from capital gains tax, but you would still owe tax on depreciation recapture

MyVirtualCPA :

So, in effect you would not avoid capital gains tax by living in it for 2 years.

Customer:

Is there any way to avoid paying these taxes?

MyVirtualCPA :

This is covered in this article on the IRS website, HERE.

MyVirtualCPA :

You could do a section 1031 exchange to defer taxes - you would swap this property for another investment property

MyVirtualCPA :

But, when you eventually sold the replacement property you would owe tax.

Customer:

So now I have to read the tax rules instead of getting the answer from You?

MyVirtualCPA :

There's no way to avoid paying the tax forever, just a way to defer it

MyVirtualCPA :

No, I was explaining the rule...but allowing you to see the authority

MyVirtualCPA :

some customers actually want to see it on the site, so I try to provide a link to the IRS to everyone

MyVirtualCPA :

I will explain it fully, though

Customer:

Would the tax be based on my income when I sell it or is it a set percentage ?

MyVirtualCPA :

The capital gain portion would be exempt if you lived in it for 2 out of 5 years. The depreciation recapture is a set percentage of 25%

MyVirtualCPA :

But, if you had it as an investment property then the capital gain portion that was not depreciation recapture would be 0% if you are in the 10-15% tax brackets, and 15% if you were in all the other brackets except the 39.6% bracket - those individuals pay 20%

Customer:

If I had it as an "investment property"? What does that mean? I ran it as a business and reported my income and loss on a Schedule C. Is "investment property" an election that You can make?

MyVirtualCPA :

This is investment - investment is anything other than personal use

MyVirtualCPA :

Typically rental property is investment property

MyVirtualCPA :

there's no election to make

Customer:

So, to finish, It won't do me any good to live there if I can be in the 10-15% tax bracket in the year that I sell it? When I retire, I believe I should be in that tax bracket. And there is no way to avoid the 25% depreciation recapture?

MyVirtualCPA :

The only way to avoid the 25% depreciation recapture would be to do a section 1031 exchange and get a replacement property - but you wouldn't be avoiding it forever, just until you sell the replacement property.

MyVirtualCPA :

And yes if you will be in the 10-15% bracket then the capital gains rate would be 0% even if you didn't live there 2 out of 5 years

Customer:

Ok Thank You very much!

MyVirtualCPA :

You're welcome

MyVirtualCPA :

If you would, please rate my response as "excellent" so that I may receive credit for assisting you today

Customer:

Will Do

MyVirtualCPA :

Thanks so much!

Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 15587
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 3 other Tax Specialists are ready to help you

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Megan C
Megan C
Tax Professional
15587 Satisfied Customers
Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level