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Tax consequences for primary residence sale which became rental property?

This is a tax question.

I had my primary residence in which I lived for around 16 months. Then due to the job situation, I need to leave that place and moved somewhere else. My primary resident got transitioned into a rental property. As I am managing my property remotely(taking care of lease documents, repairs everything) without any property management - I passed on the savings to my tenants. I generally charge around $100-$150 less per month compared to the neighborhood for long-term leases(2 years to 5 years).

I have few questions:

1. If I sell this house(once the tenant lease is over) and if I make a profit do I need to pay taxes on that? I am in 15%-20% tax bracket. Do I need to pay full long-term gains or something pro-rated(as I lived there for 16 months - one has to live for 2 years in the 5 years interval)?

2. As I am charging the tenants lower than market rent, is it called owner-occupied property? I haven't mentioned this in my last 4 years of taxes though that i am getting less than market rent.

Please guide me. Thanks in advance.

 

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5 Replies

Tax consequences for primary residence sale which became rental property?

As I am managing my property remotely(taking care of lease documents, repairs everything) without any property management - I passed on the savings to my tenants. I generally charge around $100-$150 less per month compared to the neighborhood for long-term leases(2 years to 5 years).

 

since you are passing on the savings to your tenants, the rental you are charging may be Fair Rental Value. if so, you could have a serious tax problem by not reporting the rental on your tax return for the last 4 years. consult with a tax pro in your area. 

 

the primary residence sale exclusion requires that the property be your primary residence for 730 days out of 5 years before sale. 

Hal_Al
Level 15

Tax consequences for primary residence sale which became rental property?

Q.  If I sell this house and if I make a profit do I need to pay taxes on that?

A.  If you sell within 5 years of moving out, you still qualify for the home sale exclusion, assuming your new job location was 50+ miles  further from you old home, than your previous job location.  Because you  don't meet the 2 year rule, your maximum exclusion is reduced to $167,500 ( 67%  [16 months /24] of  $250K [$500K married]).

 

Q  Do I need to pay full long-term gains or something pro-rated? 

A. For your situation (and if your gain is less than $167,500) only the depreciation recapture is taxable. Depreciation recapture is taxed as ordinary income (apparently 22% in your case) but not more than 25%.   You must pay tax on depreciation recapture even if you didn't actually claim depreciation, over the years (depreciation "allowed or allowable" is taxed).

 

I agree with Mike9241, what you describe probably constitutes "fair market" rent and you should have been filing Schedule E.  Even if it wasn't fair market rent, the income was reportable (you just don't get any deductions and depreciation is not allowable). 

 

I also agree with Mike9241 that a tax pro is recommended. 

Tax consequences for primary residence sale which became rental property?

I am "married filing jointly" case. At the most - I will be having the profit of around $200K on the sale of this property. So how much taxes I will end up paying?

I am taking regular depreciation every year when I file taxes.

Tax consequences for primary residence sale which became rental property?

I am reporting rental income in my tax returns every year. 

Hal_Al
Level 15

Tax consequences for primary residence sale which became rental property?

 For your situation, since  your gain is less than $333,333(16/24 x $500K); only the depreciation recapture is taxable. Depreciation recapture is taxed as ordinary income (apparently 22% in your case) but not more than 25%. 

 

You can enter  either as a home sale or sale of a rental, in TurboTax.  I find entering as a home sale goes smoother. 

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