Sale of a rental property

[sk4000sk2]

Hi..I am owner of a rental property, which I am selling and is now closing at end of May 2020. The background is as follows:

I lived in that rental property from Oct 2007 to Dec 17 2016, which is when I moved to a new house, which became my primary residence. From Dec  18, 2016 to Sep 30 2019, I rented out the property. Post the tenant leaving end of Sep 2019, I renovated the property and attempted to put it up for sale from Nov 1, 2019. The property is sold and closing at end of May 2020. Will I get a benefit from the 2 of the 5 year rule - 500K (Married filing jointly) for exclusion on capital gains tax, considering I moved into the new house in Dec 2016, and I am not closing on the sale of rental property until end of May 2020 even though it was not rented out from Oct 1, 2019 onward and on attempt to sell.   

[DawnC · Accepted solution]

You won't pay taxes on the first $250,000 (also known as a gain) you make from the sale of your home. If you file jointly, you won't pay taxes on the first $500,000.

That income is free and clear as long as:

• You owned the home.
• It was your main home for two years or more within the five years leading up to the sale.
• You waited at least two years between selling your primary home and excluding your first $250,000 or $500,000 from taxes. In other words, you may buy and sell as many primary homes as you'd like, but you'll only get this tax benefit every two years.

If you sell the house on May 30, 2020 - you would need to have lived in the house for two years (it does not have to be consecutive days) since May 30, 2015.  The time spent renovating the property doesn't count as time you live there unless you actually lived there while you renovated it. 

When you sell a property that was used as a rental, you must pay a 25 percent recapture tax (also referred to as Section 1250 recapture) as well as regular state income tax on the depreciation you claimed. (Remember the IRS will assume that you claimed the correct amount of depreciation every year—this is true regardless of whether you actually claimed any depreciation on your tax return).

[sk4000sk2]

Another question. In Turbo tax, is there an option for me to split the time I live in both properties in same year with majority of time in my current house and partial in the house I am selling?

[DawnC]

Yes, there is a place to enter the date.  TurboTax will ask during the interview.  Here is the IRS explanation of these rules.  Publication 523 (2019), Selling Your Home  - Your sale will be in 2020, but it should be the same.   

When you report the rental income and expenses in 2019, make sure you enter the rental and personal use days (if any) correctly.   You will be able to indicate that you converted the property back to a personal-use property.  

[Carl]

Will I get a benefit from the 2 of the 5 year rule - 500K (Married filing jointly) for exclusion on capital gains tax, considering I moved into the new house in Dec 2016, and I am not closing on the sale of rental property until end of May 2020 even though it was not rented out from Oct 1, 2019 onward and on attempt to sell.

As you know already, the "2 of last 5" rule basically states in the lived in the property as your primary residence for at least 730 days (24 months) of the last 1,826 days (60 months) you owned it, then you qualify for the exclusion. But understand the day count backwards starts on the closing date of the sale.

In your case with a closing date of May 20, 2020, counting $1,826 days back takes us to May 21, 2016.

I lived in that rental property from Oct 2007 to Dec 17 2016, which is when I moved

So based on your dates, there's no way on this green earth you will qualify for the capital gains tax exclusion. You say that *YOU* moved out of the rental in Dec of 2016. The way@DawnC has worded her response might have you thinking you qualify for the exclusion. I suspect that DawnC misinterpreted your post, because I also misinterpreted it the first time a read it. Thankfully, I read it through more than once and caught myself. Based on your dates, there's no way possible you will get the exclusion. You do not and can not qualify.

Post the tenant leaving end of Sep 2019, I renovated the property and attempted to put it up for sale from Nov 1, 2019.

Your property improvements will be entered in the Assets/Depreciation section of the SCH E. Since you did these property improvements after the last tenant moved out, you will *NOT* depreciation them because they were never placed "in service" as a rental asset.

Therefore do *NOT* enter your property improvements on your 2019 tax return since they were never placed "in service" in 2019.

Understand that the property will remain classified as "residentail rental real estate" for the entire 2019 tax year, and also on your 2020 tax return next year.

Now there's a bit of finagling you will have to do on  your 2020 tax return next year when you report the sale. For starters, one of the screens will have a selection on it for "I did not rent or attempt to rent this property in 2020". *DO* *NOT* under any circumstances and with no exceptions, select that checkbox. If you do, then you will be "FORCED" to delete the SCH E and you will lose *EVERYTHING* related to that rental property. Namely, you'll lose all the depreciation history and you'll lose all your carry over losses.

So on your 2020 tax return when asked for days rented, enter the digit ONE (it will not accept a zero). For days of personal use, enter the digit ZERO.

Then for rental income you MUST enter a digit, and in your case that digit will be a ZERO.

For rental expenses, you won't have any rental expenses. However, work it through anyway because if you did "in fact" pay any mortgage interest, property taxes, or property insurance on the property in 2020 prior to the sale closing, then you "can" and should claim those expenses.

Still on your 2020 tax return (which you won't deal with until next year) in the Assets/Depreciation seciton you'll enter all those property improvements you did after the last renter moved out. The fact they were done in 2019 is irrelevant, since the property improvment assets were "NEVER" placed in service in 2019.

When you enter those assets on the 2020 tax return your business use percentage will be 1% (one percent) because the program won't accept 0%. Then your in service date will be the closing date of your sale, which I understand is set for end of May 2020.