Question: How to we keep our tax liability as minimal as possible given the facts and plan above? Can we use the gains on selling the rental property/previous primary residence to improve upon our current primary residence to minimize tax liability?
you can not avoid paying taxes on the portion of the gain that is attributable to depreciation allowed or allowable during the rental period. This is section 1250 recapture with a maximum tax rate of 25%. to exclude up to $500,000 of the remainder of any gain, if any, you both must have occupied the house as your principal residence for any 2 out of 5 years prior to the date of sale. the ability to rollover gain on your principal residence was eliminated in 1997.
the only way to avoid taxes completely on the sale of the rental property is to do a section 1031 exchange. in a 1031, all the proceeds of the sale are held by an exchange trustee and used to purchase replacement rental property. see a real estate lawyer because if just one rule is not complied with the sale becomes taxable.
Can we use the gains on selling the rental property/previous primary residence to improve upon our current primary residence to minimize tax liability? using the proceeds to improve your current residence will do nothing to reduce the tax liability on the sale of the rental property.
