Investors & landlords

1. In 2020, will it be considered an investment property?

Yes, provided you do not live in it for one single day after the last renter moved out, as your primary residence, 2nd home, vacation home or any other "personal pleasure" use.  You will *NOT* convert the property to personal use and you *WILL* report the sale in the SCH E section of the program. Just because it may not be rented for a single day in 2020 does *NOT* change the fact that it remains classified as residential rental real estate in 2020.

2. Will the 2 of the 5 year rule still apply for me to avoid any capital gains tax in the year 2020 without reinvestment of the sale proceeds, since I already bought another house in Dec 2016? Joint ownership 500K

When you sell *ANY* real estate property, it *does* *not* *matter* what you do with the proceeds. It has absolutely no effect what-so-ever in any way, shape, form or fashion on the potential taxability of any gain you may realize on the sale.  If you qualify for the "2 of last 5" exclusion, you qualify. Basically, the home must have been your *primary* residence for at least 24 of the last 60 months you owned it, counting backwards from the closing date of the sale.

3. If it is considered an investment property and the sale in 2020 will incur capital gains tax, based on the original land value, what will be the approx gains tax amount? How will I calculate inside Turbo Tax in 2020? The property tax value for 2020 is say 350K. Also, if I have taken depreciation for 3 years during rental and deducted rental expenses, will that count into capital gains determination as well?

When you first started renting the property out, it's depreciation value is the *LESSER* of what you paid for it, or it's FMV on the date of conversion from personal use to residential rental real estate.

Property improvements done *before* the conversion to rental property can be included in the main property entry in the assets/depreciation section. Property improvements done after converting it to a rental are entered as a separate asset in the assets/depreciation section and depreciation on that specific assets starts on the date that specific asset was placed "in service". You are required by federal law to depreciate rental property.

In the year you sell the property all prior depreciation is recaptured and taxed. Recaptured depreciation is *not* exempt from being taxed under the "2 of last 5" rule. Bottom line is you *WILL* pay taxes on recaptured depreciation *no* *matter* *what*. Additionally, be aware that recaptured depreciation is added to your AGI and that has the potential to put you in the tax higher tax bracket. But with only 3 years of depreciation I wouldn't worry about it.

So in the end, if you qualify for the capital gains tax exclusion under the "2 of last 5" rule, while you will not be taxed on any gain you may realize on the sale, understand that you "WILL" pay taxes on the recaptured depreciation.

4. Will Capital Gains apply for both Federal and State? If you can suggest %

No, it will not apply to state unless your specific state allows for some kind of gains exclusion. I'm not aware of any state that does.

5. Since I will have to pay off Mortgage and HELOC post sale, will that reduce Capital Gains tax?

No. You can only deduct any interest paid on the loan, that can be "directly" attributed to the rental. So if you took out a HELOC on the rental to pay for your new primary residence, not one penny of the interest on the HELOC is deductible on SCH E. It's a SCH A itemized deduction.

6. If I reinvest the sale amount within 120 days paying off the mortgage balance and HELOC, will it avoid Capital Gains? Does the new investment has to be another real estate or can it be mutual fund, IRA, stocks, etc.?

That "reinvest" thingy when away back in 2010. What you do with the proceeds "has" "no" "effect" on the taxation of any gains realized on the sale of real estate of any type.

7. Would it be best to continue to rent or sell the property? I was thinking selling and applying the 2 of 5 year rule and avoid Capital Gains.

I'm not a financial advisor, so can't help you there. But understand that to qualify for the capital gains exclusion the property must have been your "PRIMARY" residence for at least 730 days of the last 1,826 days you owned it, counting back from the closing date of the sale.  Additionally, you can only take this exclusion once every two years.