Tax Guru – Ker$tetter Letter

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Residence Converted To Rental

Posted by taxguru on October 12, 2006

 

Q:

Subject: capital gains on principal home
 
Aloha Tax Guru!
        I have a question for you.  We purchased our Lahaina Hawaii home 12 years ago for $240,000.  We had to move to Lanai (another island) for work, but had plans to move back to Lahaina.  We have been renting a house here and renting out our home in Lahaina.  We now want to sell our home in Lahaina and buy one in Lanai.  We found out homes in the Lahaina area are going for $650,000. If we sell, we would make a profit of $410,000, well under $500,000 allowed for married couples.  However, does our home we are selling count as a primary residence if:
        !)We are renting a home to live in on Lanai
        2)We are renting out our home in Lahaina
        3)We only own one home.
Mahalo for your help! 

 

A:

You left out the most critical bit of information in determining whether or not you can use the tax free sale of your former residence.  Specifically, how long ago did you move out of that home and convert it to rental? 

As is explained on my website and in the referenced links, if it was less than three years prior to the sale, you should be able to use the Section 121 tax free exclusion.  If it was longer than that, you are no longer eligible and will be selling a rental property.

You absolutely must work with a professional tax advisor on this matter.  If you do qualify for the exclusion, there will still be some depreciation recapture to pay tax on.

If you don’t qualify for the exclusion, your advisor can hopefully help you reduce the tax hit via something like a Section 1031 exchange or an installment sale.

Good luck.

Kerry Kerstetter

 

 

 

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