Selling (currently rental) home to buy a new primary residence

[acewood77]

Hi.  I own a rental property that used to be my primary residence.  I lived in it for 5 years, but due to a job situation, I had to move, and decided to rent it out for the last 3.5 years.   I am currently in a rental myself.  I'd like to sell my original property, and use the proceeds to purchase a new primary residence.  What are the tax ramifications of that, and do I have any options?

[KrisD15]

You must own and live in the home 2 of the last 5 years in order to qualify for the Section 121 Exclusion from Capital Gain on the sale of your house. In your situation, you will need to live in the house an additional 6 months to make the 2 years.

Also, since you used the same property as your personal residence AND as a rental, the exclusion will be prorated by the percentage used as your home and percentage used as a rental. All rentals need to recapture depreciation, which means that while it was a rental, it was eligible for depreciation and once sold, that depreciation must be paid back, whether the depreciation was claimed or not. 

The ramifications would differ depending on the profit you would realize on the property, your tax rate, and what living in the house 6 more months would cost, as well as the unknown, such as the future of the housing market. 

PLEASE CLICK HERE for IRS Pub 523, Selling Your Home

[Carl]

Basically, since you did not live in the house for a minimum of 2 of the last 5 years you owned it, counting backwards from the closing date of the sale, you will pay taxes on all gain realized on the sale. What you do with the proceeds from the sale doesn't matter. You'll pay taxes on it. Period. To get a rough (very rough) determination of what your taxable gain on the sale will be:

What you paid for the property, plus what you paid for any property improvements during the time you owned it, minus the total amount of all depreciation taken, will give you your adjusted cost basis.

Now subtract the adjusted cost basis from your sale price, and the difference is your taxable gain.

Again, this is "very" rough. But will give you an idea of the amount you can expect to be taxed on. A good figure to use for taxes, is to figure 20% of your gain will go to pay taxes on that gain.

If your state also taxes personal income, then figure a percentage equal to your state's highest tax rate for what you will be taxed on by the state.

[AmeliesUncle]

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@acewood77 wrote:

but due to a job situation, I had to move

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Was your new job at least 50 miles farther away from that home than your old job was?

If so, you still qualify for an exclusion.  Depending on (1) the amount of the gain, (2) if you are filing as Married Filing Jointly or not), and (3) when you sell, it is possible it could be fully excluded (which would make it potentially tax-free, except for the depreciation).

[NCperson]

assuming the move was more than 50 miles (and understand your COMMUTE has to be an additional 50 miles... a) distance from new job to your old home has to exceed b) the distance from your old job to your old home) by 50 miles), then you could be eligible for a PARTIAL exclusion

see worksheet #1 at the attached link

https://www.irs.gov/publications/p523#en_US_2018_publink100073096

that is the same link @Carl  suggested, but I am pointing you to the worksheet #1

[Carl]

Due to the TCJA changes to tax law starting in 2018, if you are not active duty military and your move was not because of PCS orders, you're out of luck. The entire gain is taxable.

So any worksheets you may see in the program would only apply if you qualified. But if not AD/MIL you don't qualify.

[NCperson]

@Carl - can you please evidence that in an IRS publication?  That is not how publication 523 reads (or I missed it).

Certainly the moving expense is not deductible per TCJA changes (unless military), but I don't see where the partial exclusion is also affected. 

and do note, from the verbiage and tools in publication 523, it's the $250,000 that is adjusted; the capital gain is not adjusted (unless it exceeds the adjusted exclusion)

[AmeliesUncle]

As NCperson pointed out, that provision still exists.

As he also pointed out, it is a full exclusion, up to the "Reduced Maximum Exclusion" (the maximum $250,000/$500,000 is reduced).  So as I said in my original comment, depending on the amount of gain and when it is sold, it could possibly be fully excluded (no tax except for the tax on the depreciation).

[Carl]

EDIT: I removed "deduction of moving expenses" because I posted it in this thread, when it was inten...

[Carl]

Apparently, I nis-read/misinterpreted your original post. Could have sworn you said you rented it out for the last 5 years you owned it, and lived in it 3.5 years before that.

Basically, if your move was a "requirement of employment or continued employment" then you get to pro-rate. Just be aware that the longer you wait to sell, the less of an exclusion  you get. Proration is based on a 5-year lookback from the closing date of the sale.

Additionally, since it was a rental you will be paying tax on the recaptured depreciation no matter what. The depreciation recapture is not included as a part of the exclusion.

Since this property will still be classified as a rental when you sell it, you can report the sale in the SCH E section of the program making sure you select the option to indicate "this sale includes my primary residence" so that it will work you through the exclusion process.

[acewood77]

Hi, and thanks to all who have responded.  Let me clarify my situation based on what I've seen from the replies.

I moved into a home in 2011.  In 2016, I moved (much more than 50 miles) from San Antonio to Dallas for job reasons.  I converted my primary residence to a rental at that point, and it has been a rental property since.

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Now I want to sell it, and buy a new home (intended as primary residence) in DFW.

Also FWIW, the rental property has appreciated approximately $70k.

Thanks.

[NCperson]

the advise in the thread still stands... and as @Carl implores, every day that passes reduces the exclusion available....at some point (later this year or 2021) the math is going to reflect part of the gain is taxable as the capital gains as calculated will exceed the diminishing exclusion.