Hi, It will be a mix of capital gains and ordinary income just like EA said. The portion that was depreciable over the years you rented it out will need to be "recaptured" at ordinary income tax rates. There is no way that I know of to avoid this on sale of rental property unless you (1) do a like kind exchange, (2) move back into it for a number of years to try to get treatment on sale of personal primary residence, or (3) don't sell it and instead let a loved one inherit the property, in which case they get a stepped up tax basis when they inherit it....so the tax basis in the property is reset to the valuation at time of your death, or 6 months after. So they can then sell and end up paying very little in capital gains. oh yes... even if you try to avoid the section 1250 recapture by not claiming depreciation over the life of the rental, you still end up paying on it because the IRS rules have you compute the "allowable" depreciation in computing gain on sale of rental property.
As for option 2, I am still looking at that as I believe rules have changed and I have not looked at the rules in a long time. at one time you only needed to live in it for 2 years but thought I recently heard about a longer 5 year period. Regarding option 1, I had heard like kind exchanges could go away with new tax law but never heard if it actually happened.
Best wishes!!!!!!
Last edited by DreamboatAnnie; 01-23-2018 at 02:50 AM.
Don't take my comments as trading advice /IFT: 4-1-24=100G/https://www.theepochtimes.com/ & http://www.ewg.org/PermaCharts@p430#5159/strategy#4918p.410
The tax to pay capital gains and pay taxes on recaptured section 1250 depreciation does not happen until you sell the property. If you convert the rental property to your primary residence and live in it for the required period and then sell it, the answer is no...at least based on current tax law.
Best wishes!!!!!!
Don't take my comments as trading advice /IFT: 4-1-24=100G/https://www.theepochtimes.com/ & http://www.ewg.org/PermaCharts@p430#5159/strategy#4918p.410
https://apiexchange.com/impact-2018-...estate-owners/
Dec 21, 2017 - Property owners will still have the ability to convert a residence into a rental property or convert a rental property into a residence and qualify for tax exclusion benefits under both the primary residence Section 121 rules and also potentially qualify for tax deferral on the rental property under the Section 1031 ...
I read a Forbes article that says: "... the final bill maintains the exclusion for capital gains from the sale of a primary residence. This means a taxpayer who sells a home may exclude up to $250,000 of gain from taxation ($500,000 if married filing jointly) if he or she has owned and used the home as a primary residence for two of the past five years. Earlier versions of the bill would have increased the ownership and use requirements to five of eight years, and kept higher-income taxpayers from claiming the exemption at all.". (I.e. section 121)
So, this is where rental comes in, must own the "rental" for at least 5 years but live in it as Primary residence for last two years. Then if you sell it you can exclude up to $250K of the gain". So this is where more research is required. Does that exclusion only apply to the capital gain or does it include the tax on recaptured depreciation which is viewed as ordinary gain? I need to look into that too. I need to find the actual section. I had read that you could include the depreciation taken during the years the house was a rental into your gain and then apply $250K/$500k exclusion....possibly wiping out the gains completely.
I had heard about the possible increase in ownership and use requirements last year (5 and 8 years). But I did not want to live in one rental that is heavily depreciated for that long (5 years) and so I had started looking into doing a "like kind exchange" (i.e. Section 1031) with replacement/exchange for residential rental house in area I like better, for possible conversion to primary residence later..... but it started to get so complicated.... Decided to keep it for a few more years.
The like kind exchange rules seem too hard...gotta have the sale proceeds from sale of rental go to a third party (I have trust issues and maybe I just don't know enough about this) and then close on replacement property within 6 months, plus there are filings that must be done in order, and processed on time. I definitely would need to find reliable third party to hold funds in trust, etc and find out how much they charge and/or find out IF a relative can act as third party.
https://www.forbes.com/sites/samanth.../#37898e9d2c08
Last edited by DreamboatAnnie; 01-26-2018 at 07:43 PM.
Don't take my comments as trading advice /IFT: 4-1-24=100G/https://www.theepochtimes.com/ & http://www.ewg.org/PermaCharts@p430#5159/strategy#4918p.410
The BIG deal regarding residential rental property: There is a new 20% exclusion of rental income (net) for all pass through entities including sole proprietors and even for schedule E filers. Looks like you do not need to incorporate to take advantage of this. But definitely want to see how IRS puts it out. They could see this differently so I want to see official IRS information before I start celebrating.
Two seemingly good articles:
https://www.nolo.com/legal-encyclope...landlords.html
https://www.fool.com/taxes/2018/01/0...deduction.aspx
Last edited by DreamboatAnnie; 01-26-2018 at 08:59 PM.
Don't take my comments as trading advice /IFT: 4-1-24=100G/https://www.theepochtimes.com/ & http://www.ewg.org/PermaCharts@p430#5159/strategy#4918p.410
DA, while looking for information about how the new tax law might affect the conversion I saw an article which indicated that there was a tax law change in 2009 which seemed to require a proration of the gain if the property was used for anything other than residential i.e. rental. For example, if it was rental for three out of the past five years 60% of the gain could be taxable? The depreciation recapture also seemed to apply to the taxable gain portion. Didn't see anything in the new law which would change this provision. You are exactly right this is a very complicated section of the tax law especially the like kind exchange rules! Suggest a good tax expert who is familiar with this section of the law. Good luck to us all!
Interesting. Wondering if you pay someone else to manage the property, would you be eligible for the deduction?
i need to do more research on topic of moving back into existing rental and how it works, as well as like kind exchanges. Thinking if I decide to move using exclusion on sale of existing home and moving into current rental (rented for ~12 years) for a 3-4 year period and either selling (using exclusion but paying recapture on depreciation) or buying another house and return it to a rental property (assume depreciation would continue with adjusted basis for any capital improvements). Doesn't seem like there is any way around recapture when sold unless I die and it would pass to heir at a stepped up basis. How to Convert Real Estate Rental to Personal Residence | Home Guides | SF Gate gives one example where the recapture is lower than the actual depreciation taken but it is when the sale price is lower than the adjusted basis, so basically in a loss position.
The like kind exchange rules are definitely confusing and currently beyond my comprehension.
https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031 This is starting to make my head hurt
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