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Meetings
Level 3

Capital gains tax

Selling a rental property in 10 days. 

If I buy another property, rent it for 1 year, and then move into it for 2 years, then sell it, would I still have to pay capital gain taxes?

 

1 Best answer

Accepted Solutions
Critter-3
Level 15

Capital gains tax

Unless you do a correct 1031 exchange using a third party administrator  so you don't touch the proceeds of the sale then you cannot avoid paying taxes on the sale of rental in the year it is sold no matter what you do with the proceeds.  

 

And if you have not been properly depreciating the rental you need to RUN to a local tax pro to correct the error on the 2021 return.  

 

Now if you do complete a 1031 exchange and move the old basis to the new property in a timely manner then you may be able to move into the home and later use the personal residence exclusion.  

 

Go to this IRS website for section 1031 like kind exchanges - https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-ti...

 

Also see this website for like-kind exchange rules - https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx

 

View solution in original post

4 Replies
Critter-3
Level 15

Capital gains tax

Unless you do a correct 1031 exchange using a third party administrator  so you don't touch the proceeds of the sale then you cannot avoid paying taxes on the sale of rental in the year it is sold no matter what you do with the proceeds.  

 

And if you have not been properly depreciating the rental you need to RUN to a local tax pro to correct the error on the 2021 return.  

 

Now if you do complete a 1031 exchange and move the old basis to the new property in a timely manner then you may be able to move into the home and later use the personal residence exclusion.  

 

Go to this IRS website for section 1031 like kind exchanges - https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-ti...

 

Also see this website for like-kind exchange rules - https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx

 

Meetings
Level 3

Capital gains tax

Thank you.

The property has been depreciated on my tax returns over the past 7 years while it was rented.

Meetings
Level 3

Capital gains tax

Thanks!

Hal_Al
Level 15

Capital gains tax

Q.  If I buy a property, rent it for 1 year, and then move into it for 2 years, then sell it, would I still have to pay capital gain taxes?

A. Yes, but the gain would be prorated between home and rental tome.  Basically, in your example, one third of the gain (plus depreciation recapture) would be taxable.

 

The fact that you bought  the property with the proceeds of another  rental property is irrelevant (unless a proper section 1031 exchange was used).

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