Capital gain tax on primary residence turned rental property

[SamFromConnecticut]

I have just bought another house as my primary residence. I am contemplating turning my old house into a rental property. I bought the old house in 1997 for $127,000. It is valued at around $240,000 right now. If I sell the old house right now the $113,000 appreciation can be carried into my new house and I believe there is no tax liability. But if I rent it out, let's for a year, and then sell it afterwards because I decide rental is not my thing. What would be the appreciation amount that will be subjected to capital gain tax? Would the whole $113,000 be subjected to capital gain tax? Or only 1/23 of $113,000? The 1/23 is derived from the number of year I rent it out (i.e. 1 year) over the total number of year I own the house (i.e. 23 year), assuming I am selling the house in 2020. For simplicity I left out depreciation and agent commission. Thanks.

 

[Taxing Matters]

I have just bought another house as my primary residence. I am contemplating turning my old house into a rental property. I bought the old house in 1997 for $127,000. It is valued at around $240,000 right now. If I sell the old house right now the $113,000 appreciation can be carried into my new house and I believe there is no tax liability.

No, there is no longer any carry over of gain from one home to another. That ended in 1997. Now there is a better benefit that allows you to completely exclude gain on the sale of a personal residence up to $250,000 if you both owned the home and lived in it as your principal residence for at least two of the five years immediately preceding the date of sale. What that means is that if you sold now you could likely do it without having to pay any federal income tax on the gain.

But if I rent it out, let's for a year, and then sell it afterwards because I decide rental is not my thing. What would be the appreciation amount that will be subjected to capital gain tax? Would the whole $113,000 be subjected to capital gain tax? Or only 1/23 of $113,000? The 1/23 is derived from the number of year I rent it out (i.e. 1 year) over the total number of year I own the house (i.e. 23 year), assuming I am selling the house in 2020. For simplicity I left out depreciation and agent commission. Thanks.

If you rent it out for just one year then you would still get the benefit of most of the gain exclusion rule that I mentioned before, though appreciation after conversion to the rental is taxed and there is recapture of depreciation to take into account as well. But the longer you have it as a rental the less gain exclusion you get when you sell it, and eventually you lose all of it. So that means that the longer you have it, the more of the gain you currently have in it that becomes subject to tax. If you think you want to do a rental, the smarter thing taxwise here is to sell the home now if you can get the full gain exclusion and then buy a new property for the rental. that way you never pay tax on the gain you have it in right now.

The rules are well explained in IRS publication 527 on residential rental property and publication 523 on selling your home.

 

[LdiJ]

I have just bought another house as my primary residence. I am contemplating turning my old house into a rental property. I bought the old house in 1997 for $127,000. It is valued at around $240,000 right now. If I sell the old house right now the $113,000 appreciation can be carried into my new house and I believe there is no tax liability. But if I rent it out, let's for a year, and then sell it afterwards because I decide rental is not my thing. What would be the appreciation amount that will be subjected to capital gain tax? Would the whole $113,000 be subjected to capital gain tax? Or only 1/23 of $113,000? The 1/23 is derived from the number of year I rent it out (i.e. 1 year) over the total number of year I own the house (i.e. 23 year), assuming I am selling the house in 2020. For simplicity I left out depreciation and agent commission. Thanks.

Just FYI, the law that said that you could roll the proceeds from selling a home into a new home and avoid capital gains tax changed some 20+ years ago.

The new law says that as long as a home was your primary residence for at least two of the last 5 years that you avoid capital gains tax. It is true however, that you must prorate the capital gain between the time its a rental and the time it was a residence.

The best advice I can give you is to go ahead and sell it and take your profit. You won't have to pay tax on it no matter what you do with it. If you don't know whether or not you want to be a landlord, then you probably should not be a landlord. It's not for the fainthearted.

 

[LdiJ]

Looks like TM and I were typing at the same time.

 

[SamFromConnecticut]

Thank you very much gentlemen! Both of your information and advice certain enlighten me a lot. I would have to spend some time going thru the two publications and get a good sense of their contents.

Thank you again both!!