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cateag
Returning Member

Rental property sell - Capital gains

Facts:  Selling a current rental property that was our primary residence Dec 2012 - Jan 2019.   We currently own our primary residence that we purchased Jan 2019. 

Plan:  Our plan is to sell the rental property and close on it before January 2022 which would mean that it was our primary residence 2 out of the recent 5 years.   

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?

5 Replies
Critter-3
Level 15

Rental property sell - Capital gains

 

Can we use the gains on selling the rental property/previous primary residence to improve upon our current primary residence to minimize tax liability.    NOPE ... that will not work.  You MUST recapture the depreciation first which will be taxed at a rate of up to 25%.  The rest of the gain may be excluded using the personal residence exclusion. 

 
cateag
Returning Member

Rental property sell - Capital gains

Thanks for a prompt reply - We haven't done any depreciation on the rental......  I obviously need to do additional research on how that works and perhaps what we should have been doing on 2019 and 2020 taxes.  

Mike9241
Level 15

Rental property sell - Capital gains

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. 

Critter-3
Level 15

Rental property sell - Capital gains

@cateag 

 

 

OMG ... no depreciation ???    RUN to a local tax pro to file  the 2021 return to get this fixed before you sell because you must recapture the depreciation even if you never took it ... in the program it asked you to enter the assets for depreciation ... not sure how you missed those screens.    This is not a DIY situation so PLEASE seek professional assistance to get this corrected properly.

Hal_Al
Level 15

Rental property sell - Capital gains

Q.  How to we keep our tax liability as minimal as possible given the facts and plan above? 

A. You have already identified the most important thing: Sell it before January 2022, so you qualify for the home sale exclusion.

 

Q. Can we use the gains on selling the rental property/previous primary residence to improve upon our current primary residence to minimize tax liability?

A. Confirming the other answers: No.

 

Also confirming the other comments: you must pay tax on the depreciation recapture, whether you actually claimed depreciation or not.  It is possible to still get a deduction for depreciation, but it's complicated and professional help is advised. 

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