Tax

Have a Tax Question? Ask a Tax Expert

Ask an Expert,
Get an Answer ASAP!

Tax

I currently own 3 homes. My primary residence and two ...

Customer Question
I currently own 3 homes...
I currently own 3 homes. My primary residence and two rentals. I want to sell my primary residence and one rental to by another primary residence that I can also rent (one level of the house). Can I transfer equity from the rental w/o paying capital gains? Do I have to rent all the house, part of the house and for how long before I could move in to establish residency?
Submitted: 9 years ago.Category: Tax
Show More
Show Less
Ask Your Own Tax Question
Answered in 1 hour by:
8/3/2008
Tax Professional: jgordosea, Enrolled Agent replied 9 years ago
jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
Verified

Greetings,

As you may know, the criteria for excluding gain on the sale of your primary residence is that you owned and occupied the home for two years at any time within the five years prior to the sale date. See Sale of Your Home

So under current law, you can move into the rental property and live there for two years and use the exclusion when you sell that rental. If you do not use all of the property as your primary residence the exclusion of gain will only apply the the portion of the sales price that was primary residence. For example, if you used one half of the former rental as your primary residence when you sold it one half of the sales price would be used for the residence and the other half would be sale of the rental property and not eligible to be excluded.

That would be the only way you can exclude gain on the current rental that you wish to use the proceeds to buy a residence - by using the rental as your primary residence for two years prior to selling.

Please be aware that the law just signed on July 30, 2008 The Housing and Economic Recovery Act of 2008 will make a change and any time that the property is rented after January 1, 2009 will reduce the amount that can be excluded. If possible you should consider moving to the rental before January 1 to avoid "non qualified use".

See CCH's Special Tax Briefing on the Act, click here.

Gain from the sale of a principal residence home will no longer be excluded from gross income under Code Sec. 121 for periods that the home was not used as the principal residence ("non-qualifying use"). This new income inclusion rule applies to home sales after December 31, 2008, and, under a generous transition rule, is based only on nonqualified use periods that begin on or after January 1, 2009.

I hope this helps for knowing that you can exclude gain on the current rental that you wish to sell - by using it as your primary residence for two years prior to selling.

jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
Verified
jgordosea and 87 other Tax Specialists are ready to help you
Ask your own question now
Customer reply replied 9 years ago
Reply to John Gordos EA's Post: The question was, can we sell the house which is a rental now, and sell our primary residence and buy another house and then live in the newly purchased house and rent a portion of it at the same time as we are living in it to keep from owing the capital gains tax from the prior rented house to the IRS? In other words, if I do a "like property exchange" can I live in the new rental if I am renting part of it w/o paying capital gains?
Tax Professional: jgordosea, Enrolled Agent replied 9 years ago

No, you can not exchange a rental into a residence. A residence is not like kind property as a rental.

There could be a partial exchange if the property you buy is part rental and part personal; but it would only be eligible if the part you bought that was rental was of greater value than the rental that was sold. That would only happen if the new property was of significantly greater value than the rental disposed.

That is, a like kind exchange is only effective to not pay any tax on capital gains when you are acquiring property of greater value than the property given up.

I hope this helps to clarify for you.

 

Ask Your Own Tax Question
Customer reply replied 9 years ago
Reply to John Gordos EA's Post: The property being sold is worth about 425K, the property purchased worth about 1 million. I would live in half the sq.footage and rent the rest out.
Tax Professional: jgordosea, Enrolled Agent replied 9 years ago

There is a possibility of such a transaction being an exchange; but there are several difficulties that would have to be overcome.

Under Sec. 1031, if a transaction is not solely an exchange of like-kind properties, any boot received (i.e., cash, loan paid or the FMV of non-like-kind property received) triggers gain (but not loss) recognition. Also, if boot property (i.e., non-like-kind property) is given in the exchange, gain or loss is recognized on the boot property disposed.

So if the acquired property is a single unit you would have to recognize gain to the extent that non-like-kind property is acquired. That is, you would have to be able to separately acquire the like kind property from the personal use property. If there were separate units for rental and personal use that would be easily demonstrated but for renting a portion of one unit it may be difficult, if not impossible, to establish you did not receive non-like-kind in the exchange.

Neither the Code and regulations, nor the cases, set a "bright line" test of how long rental use must continue before property can be converted to personal-use property. A taxpayer's intent to hold property for business or investment use is determined at the time of the exchange.

If you can establish the rental use of the acquired property and then later begin to use the property for personal use it could be possible to treat the replacement property as entirely like kind for the rental unit relinquished.

There are regulations that specifically address the treatment of relinquished property that is part business and part personal; but the situation you describe is not specifically addressed. See the article Sale of a residence and like-kind exchanges for details (in somewhat technical language).

Also you should be aware that the amount that had previously been claimed as depreciation on the relinquished property is included in ordinary income at the time of the exchange to the extent that nonlike kind property (or boot) is received. See I.R.C. §1245 DEPRECIATION RECAPTURE, LIKE-KIND EXCHANGE

Acquiring a non-like kind property in an exchange will cause gain to be recognized. Personal property is not like kind to rental property. Gain that is recognized from a like-kind exchange of property is subject to the same recapture rules as gain recognized from the sale of the property. You should consult your accountant or tax practitioner for the recapture result of exchanging the rental for like kind property to know what will not be eligible for gain deferral.

You would have to properly structure any exchange to not include non-like-property in order to avoid gain recognition and that may not be possible with a single unit mixed use replacement property from a practical perspective even though it is technically allowable. A multi unit acquired property would clearly allow the result you are seeking.

I hope this helps present the general rules for exchange of mixed use property.

Best wishes.

Ask Your Own Tax Question
Ask jgordosea Your Own Question
jgordosea
jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
3,161 Satisfied Customers
Experience: I've prepared all types of taxes since 1987.

jgordosea is online now

A new question is answered every 9 seconds

How JustAnswer works:

  • Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction GuaranteeRate the answer you receive.

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

Meet the Experts:

Wallstreet Esq.

Wallstreet Esq.

Tax Attorney

586 satisfied customers

10 years experience

Mark D

Mark D

Enrolled Agent

1,300 satisfied customers

MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Richard

Richard

Tax Attorney

4,310 satisfied customers

29 years of experience as a tax, real estate, and business attorney.

Robin D.

Robin D.

Senior Tax Advisor 4

13,695 satisfied customers

15years with H & R Block. Divisional leader, Instructor

Megan C

Megan C

Certified Public Accountant (CPA)

8,651 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

jgordosea

jgordosea

Enrolled Agent

3,161 satisfied customers

I've prepared all types of taxes since 1987.

R. Klein, EA

R. Klein, EA

Enrolled Agent

1,839 satisfied customers

Over 20 Years experience

< Previous | Next >

Related Tax Questions
I bought a rental property for 49000 and sold it for 29000
I bought a rental property for 49000 and sold it for 29000 many years later. During those years I depreciated it entirely. So do I it don't I have to pay capital gain on the entire 29000? … read more
abci168
abci168
Principal
27 satisfied customers
My question is about depreciation for rental property. My
Hello. My question is about depreciation for rental property. My rental property had no income during one year. In this case, since there was no income, I do not need to claim depreciation for that sa… read more
Fred Rook
Fred Rook
Corporate Controller
BSBA
31 satisfied customers
My wife inherited a piece of rental property from a
My wife inherited a piece of rental property from a revocable trust that her parents had set up after her father and brother died her mom did an amendment that made her trustee and sole heir. Her mom … read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
Is the sale of customer list a capital gain or ordinary income?
Is the sale of self-created intangibles, such customer lists, digital files, web sites, etc subject to capital gain or ordinary income treatment?… read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
Im semi retired ,sold a rental property Ive had for 3 yrs &
Second opinion] Im semi retired ,sold a rental property Ive had for 3 yrs & have a capital gain about 60K . Im single no dependants & will have about 30 k in 1099 income this year. Will I owe 15% tax … read more
Chad CFP ®
Chad CFP ®
Certified Financial Planner(R), Pro
Master\u0027s Degree
717 satisfied customers
Are you familiar with Capital Gain taxes on rental property?
Are you familiar with Capital Gain taxes on rental property? … read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
I have a question regarding the ordinary income tax. If the
Hello, I have a question regarding the ordinary income tax. If the ordinary income tax due is negative does that apply anywhere? This pertains to the sale of an S corp .business. … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
13,695 satisfied customers
My grandma has a rental property held personally since the
Hi Mark, My grandma has a rental property held personally since the year 2000. We want to transfer the house into an LLC. On the date the rental property is transferred into the LLC what is the holdin… read more
socrateaser
socrateaser
1,031 satisfied customers
I sold a rental property at a loss (no capital gains);
I sold a rental property at a loss (no capital gains); however should I pay the $133,000 on the principal of my house I owe 166,000 at 2.8% or buy another rental? … read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
We have $400,000 in capital gains for the sale of our
We have $400,000 in capital gains for the sale of our California home of … read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
What is the capital gains tax on proceeds of the sale of a
What is the capital gains tax on proceeds of the sale of a home? … read more
Mark Taylor
Mark Taylor
Certified Public Accountant
Masters
2,215 satisfied customers
Disposition of Rental Property. Rental property: Gross sale
Disposition of Rental Property.Rental property : Gross sale price: $600K Cost or Other Basis plus Selling Expenses: $300K Depreciation allowed or allowable: $100K (Form 4797 line 22)Adjustment: $300K … read more
emc011075
emc011075
Senior Tax Specialist
Bachelor's Degree
16 satisfied customers
Capital Gains Question: My parents have a rental property
Capital Gains Question: My parents have a rental property they bought for $150,000 several years ago. The property is now worth around $500,000 dollars with a $350,000 mortgage. They want to gift me t… read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
We are considering purchasing a rental property in Cape. My
we are considering purchasing a rental property in Cape Cod. My understanding to get the full tax advantage I am only allowed to stay in the property for 14 days. Is this the case even when the rental… read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
Installment Sales - A taxpayer owns rental property (over
Installment Sales -A taxpayer owns rental property (over several years). Taxpayer is selling rental property and will hold the mortgage for the purchaser. Will this be considered a straight sale, reco… read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
13,695 satisfied customers
I am working on my taxes. I sold a rental property and
I am working on my taxes. I sold a rental property and according to my tax software (TurboTax), I had ~$100k gain. How does this get considered? Is it weighed in with all my gains and losses across my… read more
Mark Taylor
Mark Taylor
Certified Public Accountant
Masters
2,215 satisfied customers
I didn't claim depreciation on a rental property for 8
I didn't claim depreciation on a rental property for 8 years. I'm about to sell the property. How many years of the past annual depreciation can I claim? … read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
I sold a rental property and fully depreciated furniture and
I sold a rental property and fully depreciated furniture and fixtures such as refrigerator/oven/doors etc. Would I have to recapture the FF&E depreciated amounts as ordinary income with the sale when … read more
Mark Taylor
Mark Taylor
Certified Public Accountant
Masters
2,215 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less

Ask Your Question

x