Qualifying for 250K Capital gains exemption on sale of property

[wrangler18]

I have a condo in NYC that I lived in from March 2013 until October 2018. In October the property became a rental property.

At some point in the next year I would like to sell the property. 

I read that if the seller occupied the property for 2 of the last 5 years he qualifies for the 250K capital gains tax exclusion.  

I think that means I need to sell it by October of 2021 to qualify for the full 250K cap gain exemption.

Oct 2016 - Oct 2017 Owner occupied

OCt 2017 - OCt 2018 -Owner occupied

Oct 2018 - Oct 2019 - tenant occupied

Oct 2019 - OCt 2020 - tenant occupied

Oct 2020 - Oct 2021 - tenant occupied

After Oct 2021, each month of non-residency in the last 5 years will cost me 1/24 (4.167%) of capital gains exemption.  That's $10,417 in exemption.  At a 15% tax rate that is worth $1562.

Am I thinking about this correctly?

[Carl]

If the property was your *primary* residence for at least 24 of the last 60 months (2 of last 5 years) you owned it, then you qualify for the capital gains exclusion. The "look back" counts back 60 months from the closing date of the sale. The 24 month primary residence requirement does not have to be 24 consecutive months either, so long as all 24 of those months falls within the prior 60 months of ownership.

Also note that since you are required by law to depreciate rental property, and then recapture that depreciation when you sell it, understand that you *WILL* *PAY* *TAXES* on any and all recaptured depreciation no matter what.

Also understand that you are not required to own the property for 60 months/5 years. You *are* required to have it as your primary residence for at least 24 months/2 years.

[wrangler18]

Thanks Carl.

Will my cumulative losses from operating the rental property be netted against the recaptured depreciation?

[AmeliesUncle]

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@wrangler18 wrote:

After Oct 2021, each month of non-residency in the last 5 years will cost me 1/24 (4.167%) of capital gains exemption. 

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No (well, probably not).  If you don't meet the 2/5 year rule, you don't get to exclude ANY of the gain.  There is an exception if you moved out for qualifying reasons, but the general rule is that if you don't meet the 2 year rule, you pay tax on the full amount of the gain.

Your Passive Loss carryover will be deducted as "ordinary income (loss)", which means it deducts from your regular high-tax-bracket income.

[wrangler18]

"Your Passive Loss carryover will be deducted as "ordinary income (loss)", which means it deducts from your regular high-tax-bracket income."

What if I don't have any income?  Does the passive loss carryover reduce my capital gains?

[AmeliesUncle]

The capital gains is income.   So yes, the Passive Loss carryover will reduce that income.

[wrangler18]

I think the pro-rated exemption is a real thing.  Take a look at IRS Pub 523 page 7.

I screen-shotted the relevant parts here.

[AmeliesUncle]

Yes, that says IF you are ELIGIBLE for a reduced exclusion.  As I said before, you need to meet qualifying circumstances for that.  See page 6.

[wrangler18]

Yes you are correct.  Thank you.

I was reading it hoping to see what I wanted to see.  ;>

[wrangler18]

I'm hoping the government extends look-back periods for Cap Gain exemptions b/c of COVID-19.  The real estate market is absolutely bleak right now.  

[AmeliesUncle]

It seems unlikely to me.  You already have a 2 out of 5 year rule, and that should give you A LOT of flexibility.   They did not extend it when the housing market was REALLY bad in 2008-ish (actually they tightened it up a bit).  And according to my real estate agent, my area doesn't look too bad.

If you are worried about meeting the 2 years, DON'T wait until the last minute.