Have a Tax Question? Ask a Tax Expert
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.
You would be exempt from capital gains tax, but you would still owe tax on depreciation recapture
So, in effect you would not avoid capital gains tax by living in it for 2 years.
Is there any way to avoid paying these taxes?
This is covered in this article on the IRS website, HERE.
You could do a section 1031 exchange to defer taxes - you would swap this property for another investment property
But, when you eventually sold the replacement property you would owe tax.
So now I have to read the tax rules instead of getting the answer from You?
There's no way to avoid paying the tax forever, just a way to defer it
No, I was explaining the rule...but allowing you to see the authority
some customers actually want to see it on the site, so I try to provide a link to the IRS to everyone
I will explain it fully, though
Would the tax be based on my income when I sell it or is it a set percentage ?
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%
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%
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?
This is investment - investment is anything other than personal use
Typically rental property is investment property
there's no election to make
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?
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.
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
Ok Thank You very much!
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Thanks so much!