Capital gain on selling house

[Adam2323]

I bought a house and lived their with my wife for around 1 year but had to move due to losing my job and getting new job in another city which is more than 50 miles away, I rented the house for one year, hoping to come back but failed to find a job in that city, now I am thinking to sell it, do I qualify for Tax reduction or I will be pay ing the  full  profit gain amount? Appreciate your input.

[MSCO9241]

a reduced exclusion is available if the primary reason that your principal residence is sold is due to change in place of employment. since you should have depreciated the home during the rental period that portion of the gain will be taxable. employment includes the start of work with a new employer or a new location with the same employer. there are safe harbor rules as follows. a change in place of employment is considered to be the primary reason the taxpayer sold the home if:

1) the change occurred during the period the taxpayer owned and used the property as a main home 

2) the new place of employment is at least 50 miles farther from the home,m that is sold than the former place of employment was.  example.  distance old place of employment to home sold 10 miles. distance new place of employment to home sold must be at least 60 miles.

the partial exclusion is based on months (or days) used as your main home to 24 months (or 730 days)

say you used it as main home for 12 months.  your exclusion would be 50% (12/24) of $250,000 or $125,000.

the depreciation recapture can not exceed the gain ignoring the exclusion. say gain ignoring exclusion is $10 and depreciation is $12. $2 is taxable as depreciation recapture.  say gain is $137, $12 is taxable as depreciation recapture the rest is excludable. say gain is $150 $12 is taxable as depreciation recapture $125 is excludable $13 is taxed as capital gain 

[Good2323]

Thanks a lot for the explanation, do you know how much the Tax on capital gain

[Mike9241]

the capital gain rate you'll pay depends on your income, qualified dividends and other long-term capital gains. 

[Hal_Al]

Depending on how much total income you have LTCG are partially taxed at 0%, 15%, 20% and/or 23.8%. Depreciation recapture is taxed at your marginal rate, but not more than 25%.

Note that the "partial exclusion" is really  only a reduction in the maximum exclusion.  That is, you may exclude your entire gain (except depreciation recapture) as long as that gain is under $125,000.

Using an example: you bought the house for $100,000 and sold for $200,000.  You claimed (or should have claimed) $5,000 in depreciation during the year  your rented it out.  Only the $5000 is taxable and it's taxable at your marginal tax rate (probably 12%). 

[Good2323]

I bought a house and was my primary residence for 11 month, due to being terminated from work, I moved to another city for new job which is 150 miles away,,I rented out the house for 22 months, as I was hoping to go back but couldnot, then I sold the house.

do I pay the full capital gain Tax.

I spoke with 2  CPA one of them said you will get half the waiver as a married tax jointly so the waiver will be prorated to 11 month and the other CPA said since it was rented house=investment house then you have to pay the full capital gain and no exemption.

I am very confused whom to believe.

[AmyC]

@Good2323 Go with what the IRS says. You have an exception to the 2/5 year rule but do have rental depreciation which must now be included.  Publication 523, Selling Your Home provides rules and worksheets. Including:

• Space formerly used for business or rental. Space that was once used for business or rental purposes may be considered as residence space at the time of sale. A space formerly used for business is considered residence space if ALL of the following are true.

  • You weren’t using the space for business or rental at the time you sold the property,

  • You didn’t earn any business or rental income from the space in the year you sold your home, and

  • You used the space as residence space for 2 years out of the 5 years leading up to the sale.

If your space is considered as residence space at the time of the sale, then your former business usage DOESN’T affect your gain/loss calculations, unless you took or were allowed to take depreciation for use of your home for business or rental purposes

[Hal_Al]

 Having been  a rental (after being  your primary residence) does not disqualify you from claiming the home sale exclusion, as long as the 5 year rule is met.  You may exclude your capital gain (except depreciation recapture) up to $229,167 (11/24 [45.83%] of $500,000)

[Good2323]

Amy another question,

you said the house at the time of selling must be a residence space.

mine was vacant for 2 months

All utilities are under my name

i was just visiting and staying at weekends

Is that a residency status

[AmyC]

@Good2323 Being vacant means that you moved and  were not renting it (or using it as a business). No problem there as it was your primary residence until you were forced to move for work.

@Hal_Al is correct as always in the post above.