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Question about the “2 years of the 5-year period” rule on selling a house

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shawnusa

Member
What is the name of your state (only U.S. law)? Mass

I bought a new house last year. The old house is for rent. I understand if I sell the old house within 3 years(I lived there for 10 years already), I do not need to pay tax on the gain.

My questions are:

1. If I sell the new house in 9 years and move back to the old house, should I pay tax on the gain(selling of the new house)?

2. After move back to the old house(was for rent), live there for 2 years then sell it, should I pay tax on the gain(selling of the old house)?

3. Should I sell the old house now or rent it out? Which way is better?

Thanks!
 


FlyingRon

Senior Member
I bought a new house last year. The old house is for rent. I understand if I sell the old house within 3 years(I lived there for 10 years already), I do not need to pay tax on the gain.
Well actually, you can exclude $250,000 of the gain (per person on the deed).

1. If I sell the new house in 9 years and move back to the old house, should I pay tax on the gain(selling of the new house)?
If you live in a new house for nine years, you qualify for the capital gains exclusion.
2. After move back to the old house(was for rent), live there for 2 years then sell it, should I pay tax on the gain(selling of the old house)?
Yes, but since you rented it out for a protracted period, you should have been depreciating that and the depreciation recapture will need to be computed into it.
3. Should I sell the old house now or rent it out? Which way is better?
Not enough information to answer that. Do you think you can get a reasonable price for selling it? Do you think you can get a reasonable rent while renting it out? How cash/credit strapped are you? Can you deal with the possibility that you may be without (paying) tenants for several months?
None of this is legal issues, just financial ones.

Is the house paid for? If so I'd really consider keeping it as a rental, that's usually not too bad of an investment and if you end up without tenants it's not the end of the world without a mortgage to cover.
If you have a mortgage and you're not upside down, I'd try to sell it.
That's just my financial (again rather than legal) opinion.
 

tranquility

Senior Member
2. After move back to the old house(was for rent), live there for 2 years then sell it, should I pay tax on the gain(selling of the old house)?
In addition to what FlyingRon said, the OP's scenario may implicate Code Sec. 121(b)(5) regarding exclusion of gain allocated to nonqualified use.
 

shawnusa

Member
Yes, but since you rented it out for a protracted period, you should have been depreciating that and the depreciation recapture will need to be computed into it.

Not enough information to answer that. Do you think you can get a reasonable price for selling it? Do you think you can get a reasonable rent while renting it out? How cash/credit strapped are you? Can you deal with the possibility that you may be without (paying) tenants for several months?
None of this is legal issues, just financial ones.

Is the house paid for? If so I'd really consider keeping it as a rental, that's usually not too bad of an investment and if you end up without tenants it's not the end of the world without a mortgage to cover.
If you have a mortgage and you're not upside down, I'd try to sell it.
That's just my financial (again rather than legal) opinion.
Thank you so much for the advice.

Do you mean on the question number 2, I am not qualify for the capital gains exclusion? So, I need to pay full tax on the gain when I sell the old house?

That is my concern, I may consider to sell it if I do need to pay tax on the gain later on when sell the old house. The gain is about $200,000; that is a lot of tax to pay(do not know the percentage tax need to pay on the gain).

Yes, the old house is paid off. If I put the money(sell the old house) in the bank with 2% return, then I am lose money by renting it out, since I cannot charge too high on the rent.
 

FlyingRon

Senior Member
Do you mean on the question number 2, I am not qualify for the capital gains exclusion? So, I need to pay full tax on the gain when I sell the old house?
Not quite, but the exclusion is curtailed based on the part you rental possibly.
 

shawnusa

Member
How much is the house worth and how much can you charge for rent?
The house I believe worth at least $390,000 and I charge $1930 per month for the rent without utilities. The tenant will take care of the lawn in summer and snow in winter.

It is 17 years old house, it seems to start cost me to fix things. Just spent $2000 to replace the door.



Thanks all for your input and advise!!! I do need help.
 
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LdiJ

Senior Member
The house I believe worth at least $390,000 and I charge $1930 per month for the rent without utilities. The tenant will take care of the lawn in summer and snow in winter.

It is 17 years old house, it seems to start cost me to fix things. Just spent $2000 to replace the door.



Thanks all for your input and advise!!! I do need help.
You need to be a little more practical about repairs and replacements if you do continue to keep it as a rental. $2000.00 for an exterior door (at least I hope it was an exterior door) was a bit steep.
 

shawnusa

Member
You need to be a little more practical about repairs and replacements if you do continue to keep it as a rental. $2000.00 for an exterior door (at least I hope it was an exterior door) was a bit steep.
It is a sliding door. I am kind in the middle on what to do next, sell it or continue renting it out. I will not pay tax on the gain if sell it now. But if for some reasons I have to sell it later, then I have to pay tax(do not know how much). Do not know if the house value increase will cover the tax payment to the IRS(hope the housing market will get better soon).
 

FlyingRon

Senior Member
It is a sliding door. I am kind in the middle on what to do next, sell it or continue renting it out. I will not pay tax on the gain if sell it now. But if for some reasons I have to sell it later, then I have to pay tax(do not know how much). Do not know if the house value increase will cover the tax payment to the IRS(hope the housing market will get better soon).
Your capital gain rate is probably less than your regular income rate. However, let me bring up something that I mentioned before. IF YOU ARE RENTING THE PROPERTY and you do not understand the requirement to take the depreciation deduction, find a tax consultant who can help you do so. This is not optional. If you don't take it, you'll end up getting hit in the long run anyhow.
 

tranquility

Senior Member
I'd say from a number perspective, without regard for appreciation or reduction in value based on the market, it's close. With a gross of $23,160, it seems unlikely you are going to have a negative cash flow on the property unless you keep no fund at all for major repairs. With no principal or interest due on a loan, not only will you probably have a positive cash flow, but also will probably have a profit.

I bet the advantage of the $30K reduction in taxes if sold now will take about 13 years to make up from tax advantages of owning property. After that, you have about another 14 years before you need to sell or exchange up to keep the tax advantages.

However, being a landlord can be trying even of a single family home. It's not free money and is hard work. For some reason, from the OP's posts, I'm thinking the hassle just won't be worth it. (I'd try to get more than 2% on the money. Unless you are already retired, you need to take more risk.)

The final answer is to see an accountant who can really work your numbers and give you the facts behind your decision. I bet you will find that if you intend to keep the house for a decade or less, it will be better financially to sell. (Mentally too.) If more, you have to decide how much effort you want to put into this job. If you spend the time and get the training, you will be in a great position to chart your future in a decade.
 

shawnusa

Member
IF YOU ARE RENTING THE PROPERTY and you do not understand the requirement to take the depreciation deduction, find a tax consultant who can help you do so. This is not optional. If you don't take it, you'll end up getting hit in the long run anyhow.
Thanks FlyingRon!

I found this online, depreciation calculation:
1. Purchase price - Land Value = Building Value.
2. Building Value / 27.5 = Annual allowable depreciation deduction.
But, my purchase price was 17 years ago and could not find the land value back then; so if I use the land value now then end up get a negative building value. You are right, I do need a tax consultant’s help.




I bet the advantage of the $30K reduction in taxes if sold now will take about 13 years to make up from tax advantages of owning property. After that, you have about another 14 years before you need to sell or exchange up to keep the tax advantages.

I bet you will find that if you intend to keep the house for a decade or less, it will be better financially to sell. (Mentally too.)
Thanks tranquility!

I have long way before retire, so I may choose to take more risk. I will keep the house for rent if the advantage of the $30K reduction in taxes if sold now is not a big deal(lose) in long term.



Once again, thanks all for your help. I have learned a lot from you.
 
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