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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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I sold a home that has been a rental for over twenty three

Customer Question

I sold a home that has been a rental for over twenty three years. I orgininally lived in it for about four years before renting it out. How can I avoid paying taxes on the proceeds without breaking the rules? I am contemplating purchasing a more expensive property to use as a rental, will that be effective and if so how long do I have to make the purchase?
Submitted: 8 years ago.
Category: Tax
Expert:  Ed Johnson replied 8 years ago.

Dear MM,


If that four years was not in the past 5, which it seems is the case, then you are not able to get any of the exclusion for selling a primary home.


When you sell this you will be subject to both capital gains and recapture of excess depreciation, if any. depending on how this was depreciated your deprecation will be taxed as regular income, capital gains, or as recapture taxed at 25%.


You can not avoid capital gains tax. However you can defer it by doing what is called a 1031 or like kind exchange.


Generally (primarily) you have six months to complete the exchange after you close on the sale of the property. You have to designate the exchange before closing, and you have to use an exchange agent.



Customer: replied 8 years ago.
duh I meant to say defer but it must have been too late for my brain to properly work. I did depreciate the property over a period of 19.5 years. It never "turned" a profit but I was not allowed to take "all the losses". Sounds like I am going to have a pretty big tax bill with little to nothing to be done. Any suggestions will be appreciated
Expert:  Ed Johnson replied 8 years ago.

Dear Mmounts,


Thank you for getting back to me. I understand. When I work late at night I start getting huge spelling errors.


If you were not allowed the passive losses during the time you held the property, you are allowed to take them in the year of sale.


You are correct if you already sold this property, you have lost the opportunity for a 1031 exchange.