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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4379
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Can I rent my primary residence for 4 years, then use the sale

Resolved Question:

Can I rent my primary residence for 4 years, then use the sale profit to buy another house and not pay capital gains?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Lane :

Hi

Lane :

This can only be done in one way .... it's called a 1031 exchenge

Lane :

Ir won't sork if you're trying to buy a residence ... but if you're trying to buy aother rental house .. that's exactly what a 1031 exchange is for (IRS calls this a like-kind exchange)

Customer:

If I only rent for 3 years, then sell and make more than the exclusion of 250,000, do I have a time period of 1-2 years to buy another residence without paying capital gains?

Lane :

Please don't shoot the messenger here, but no, capital gains is never excluded on a rental home .... must be your primary residence

Lane :

now... taking the rental out the equation altogether... you can get the exclusion on gain of primary residence, essentially, every two years

Lane :

but once you bring in the rental time period everything changes (because of the other benefits you get there depreciation, maintenance & repair, etc

Customer:

It is my primary residence, but I am living with my daughter for 3 years to help pay the taxes etc., then will sell. I thought I get the exclusion if I live in the house 2 of the last 5 years.

Lane :

2 out of the last five is correct ... but again, there are overriding rules of part of that 5 yr time frame the house in question was used as a rental ... (to prevent people fom renting , getting all te benefits of that, moving babk in and then getting an exclusion on top of THAT)

Lane :

Hang on a sec and I'll get the regs for you... there is a worksheet that must be used

Lane :

Here we go:

Lane :

When homeowners sell their main home, they can exclude the 250k to 500k based on filing status from income tax. The Housing Assistance Tax Act of 2008 changes the rules. The amount of profits from the sale of a house that can be excluded is now based on the percentage of time when the house was used as a primary residence.

Lane :

When the property isn't used as a primary residence during the entire five-year period, ( house might be rented out, used as a vacation home, or used as a second home, such uses of the home will be considered non-qualifying use and could subject gains from the sale of the house to tax).

Lane :

Gain from the sale of a home may need to be allocated between what gain be excluded and what gain is not excluded. The portion of capital gains that cannot be excluded is determined by the following ratio:


 


Period of non-qualifying use
--------------------------------------
Period of ownership
Lane :

For the purpose of calculating capital gains, the period of non-qualifying use is any period of time the property is not being used as a main home that begins on or after January 1, 2009. Non-qualifying use prior to January 1, 2009, is disregarded for the the purpose of determining the capital gain allocation.

Lane :

Now, this MAY apply for you depending on your flexibility (ability to control the time periods of residency use):

Lane :

"Temporary absences not exceeding a total of two years in aggregate will not jeopardize qualifying use. A property can maintain its status as a primary residence even if the homeowner is absence due to change in employment, health conditions, or other unforeseen circumstances."

Lane :

Here's a quote from an excellent article by XXXXX XXXXX ... an Enrolled Agent:

Lane :

Taxpayers owning second homes, vacation homes, and rental properties will need to revise their capital gains strategy accordingly. The use test is applied for the time period beginning January 1, 2009, until the property is sold. To get the most tax benefit, the property will need to be used entirely as a primary residence during this time period.


Taxpayers planning to sell a second home may want to move in and make that property their primary residence starting January 1, 2009, to gain as much qualifying use as possible before selling it.

Customer:

Thanks

Lane :

You're very welcome ... hopefully having all the facts here'll help you "see arond some corners."

Lane :

If this has helped, I would appreciate a feedback rating of 3 (OK) or better (excellent, is ideal)… That's the only I get credit for the work.


However, if you need more on this, please come back here, so you won't be charged for another question.

Lane :

Other questions?

Customer:

On the ratio, is it period of non-qualifying use since 2009 over years owned in total or just from 2009?

Lane :

Here's the worksheet I mentioned ... IT's a the bottom of IRS publication 523: http://www.irs.gov/publications/p523/ar02.html#en_US_2012_publink1000200855

Lane :

just from 2009

Lane :

Wait let me look again

Lane :

Yes," For the purpose of calculating capital gains, the period of non-qualifying use is any period of time the property is not being used as a main home that begins on or after January 1, 2009. Non-qualifying use prior to January 1, 2009, is disregarded for the the purpose of determining the capital gain allocation."

Lane :

"... that begins on or after January 1, 2009. Non-qualifying use prior to January 1, 2009, is disregarded for the the purpose of determining the capital gain allocation."

Customer:

Thanks again

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4379
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks Barbara,

Yes the disregarding of the pre-2009 for non-qualifying use is essentially the grandfathering of the issue...since the statute went into effect 01-01-2009.

If you'd like to ask for ME again, just go here to enter your questions: Lane

Thanks again,

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4379
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you

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Lane
Lane
Tax Professional
4379 Satisfied Customers
Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986