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

Forum|Forum|6 years ago
January 21, 2020
3 replies
9 views

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

Level 15

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

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

Carl

Level 11

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

Level 15

@acewood77 wrote:
but due to a job situation, I had to move

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

Level 15

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 @Carl11_2 suggested, but I am pointing you to the worksheet #1

Carl

Level 11

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.