How to calculate capital gains when the primary home bought 12 years ago was leased for the last 5 years before the sale this year?

[Mike Jr]

What is the name of your state?Florida

 

[FlyingRon]

Best bet would be to find a proper tax advisor. It's a little involved.

Your capital gain is the difference between the sales price and your basis. Basis is what you paid for the property adjusted by any capital improvements made. You can also deduct some of the direct costs of the sale (real estate commision, repairs to put the place on the market).

That's all relatively straight forward, but here's where it gets tricky. The basis is decreased by the amount of allowable depreciation that you were entitled to take on the rental use, EVEN IF YOU DIDN'T TAKE IT. That part of the gain is also taxed at a (possibly) different rate than the rest of your gain. Best to let someone who does this for a living take care of it.

 

[Mike Jr]

Thanks Ron for your advice. But want to understand what the overall tax implication will be. While calculating the capital gains - will the basis change to what was home value 5 years ago as it was used as primary home for 7 years prior to leasing?

 

[Zigner]

Thanks Ron for your advice. But want to understand what the overall tax implication will be. While calculating the capital gains - will the basis change to what was home value 5 years ago as it was used as primary home for 7 years prior to leasing?

Why thank him for the advice if you ignore it in (literally) the next breath?

 

[HRZ]

With a bit of homework you should be able to come close : the basis for depreciation is the lesser of either its adjusted basis or its fair market value at the time the property was placed in service for rental purposes.

 

[FlyingRon]

Your basis is based on your original purchase price. It matters not what the value was when you converted it to rental use. There's no exclusion or other tax benefit for you having it as a personal residence in this case.

HRZ's statement only applies to you calculating what the depreciation deduction should have been. It would have been your original basis or the FMV at the time it was converted. However, note that the entire purchase price likely isn't depreciable. Only the building is depreciable, the land is not.

Again, I'd recommend a tax advisor.

 

[Taxing Matters]

But want to understand what the overall tax implication will be. While calculating the capital gains - will the basis change to what was home value 5 years ago as it was used as primary home for 7 years prior to leasing?

No, the value of the home when you converted it to a rental is not a factor here, at least not directly, What will happen is that the basis starts with the price you paid for the home. Then you increase basis for any improvements (but not routine repairs/maintenance) made to the home after you bought it, and decreased by depreciation that you took or could have taken. If you had a home office before the rental, you may have depreciation to account for. And certainly there is depreciation to include for the period of the rental. How the depreciation is computed is beyond the scope of my reply here. I'll just note that the value of the home (the building itself, not the land) at the time you converted to a rental does factor into how the depreciation is computed, so that has an indirect impact on the basis computation. Basis may also be reduced for casualty loss, too. What you end up with is your adjusted basis.

Then you tax your gross sales price for the property and reduce that by allowable expenses. The result is your net sales price. Your capital gain is the difference between your net sales price and your adjusted basis.

Since it was rented for all of the last five years, you will not get any exclusion of gain under Internal Revenue Code (IRC) section 121, which excludes from income some or all of the gain from the sale of your principal residence when certain conditions are met. One of those conditions was that you had to live in the home as your principal residence for at least two of the five years immediately preceding the date of sale.

Note that some of the gain you have may be treated as ordinary income due to depreciation recapture.

See IRS publication 544 on the sale of assets and IRS publication 551 on basis for more information. Note that these publications are for 2017; the IRS does not yet have publications for 2018 up on the site yet. The 2017 publications will not discuss changes from last years tax act, but as to the computation of basis and gain there are no changes.