Capital gains on house when refinanced before ever rented out. ie. bought/lived in house; refi; lived in house; rented house; sold house. Where is baseline for gains?

[colorado_living]

Purchased and lived in home 2001

Refinanced in 2004.

Moved out of home in 2011 (married)

Rented house out in 2012

Sold house in 2017

Determine capital gains based upon 2001 price or 2004 refinance.

The question is due to capital gains of selling an income property seemed to be due to increase in value of property.  The increase of this property was the increase since the refi, not since purchase as that increase was increase in value of main home.

[Coleen3 · Accepted solution]

The refinance has nothing to do with determining basis. To exclude any gain, you must have lived in the house 2 out of the five years prior to the sale.

When you converted the property from personal use to rental, the basis for depreciation was lower of the Adjusted Basis or the FMV on the date of conversion.

Now that you are selling, it gets a little trickier.

Calculating Gain/Loss on Subsequent Sale of Rental Property

If a residence converted to rental property is later sold at a gain, the basis in the converted property is the original cost or other basis plus amounts paid for capital improvements, less any depreciation taken.

 If the sale results in a loss, however, the starting point for basis is the lower of the property’s adjusted cost basis or FMV when it was converted from personal to rental property (Regs. Sec. 1.165-9(b)(2)). This rule is designed to ensure that any decline in value occurring while the property was held as a personal residence does not later become deductible on the sale of the rental property

[colorado_living]

Thank you very much.  I was finding every situation regarding a refi while living in the house and they all said exactly the same as you did.  I was just hoping that the status of the house would change the taxable amount.  Future reference, I'll have to remember this.
Thank you again!!