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oswaltmike
New Member

As a resident of CA, will I have to pay any Federal or CA taxes on the sale of a home in MI that we own that valued less than $200,000?

This will occur in 2017 - just planning for what to set aside from any money we do get out of the house sale. thanks!
7 Replies
DS30
New Member

As a resident of CA, will I have to pay any Federal or CA taxes on the sale of a home in MI that we own that valued less than $200,000?

Was this your main residence for at least 2 of the last 5 years before the home sale?
oswaltmike
New Member

As a resident of CA, will I have to pay any Federal or CA taxes on the sale of a home in MI that we own that valued less than $200,000?

Yes it was.
DS30
New Member

As a resident of CA, will I have to pay any Federal or CA taxes on the sale of a home in MI that we own that valued less than $200,000?

It depends but if the gain from your home sale is exempt under the home gain exclusion (and you have not rented or taken the home office expense), you will not have to report the home sale or pay any taxes on your home sale for federal, CA or MI income tax purposes.

You do not need to enter the sale of your primary residence and there is no federal or state reporting requirement if:

  • You never used your primary residence as a rental or took home office deduction
  • You have a loss on the sale of your home (Personal capital losses are not reported on your tax return)
  • You did not receive a Form 1099-S and
  • You meet the home gain exclusion (see below)

You can take the gain exclusion as long as you considered the home your "primary residence" for 2 of the last 5 years. If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income. You may qualify to exclude up to $500,000 of that gain if you file a joint return with your spouse. See  Sale of Your Home for more information on the exclusion.

Please note that if you used the property as a rental during your ownership of the property, you will need to recognize a capital gain on the depreciation recapture amount.

According to the IRS, when you sell a property that was used as a rental, you must pay 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).

In order to calculate the capital gain or loss when you sell a residence that had been converted to rental property, you need to know three things:

  • Your adjusted tax basis in the property (both at the time of the conversion and the time of the sale)
  • The sale price
  • The fair market value of the property when it was converted to rental property

If the converted property is later sold at a gain, the basis for purposes of determining the capital gain is your adjusted tax basis in the property at the time of the sale. If the sale results in a loss, however, the basis used is the lower of the property's adjusted tax basis at the time of the conversion or the fair market value when the property was converted from personal use to rental property. This loss rule ensures that any deflation in value occurring while the property was held as a principal residence does not later become deductible upon your sale of the rental property; a loss on the sale of a principal residence is not deductible. As usual, you calculate your capital gain by subtracting your adjusted basis from the sale price of the property.

Click this link for further information about reporting the sale of a capital asset

oswaltmike
New Member

As a resident of CA, will I have to pay any Federal or CA taxes on the sale of a home in MI that we own that valued less than $200,000?

Thanks so much. To be clear, of the past 5 years, we had renters in it for 18 months. Does that change anything?
DS30
New Member

As a resident of CA, will I have to pay any Federal or CA taxes on the sale of a home in MI that we own that valued less than $200,000?

Yes. This will make a difference. You will need to report the capital gain on the depreciation recapture on your federal, CA and MI state income tax returns. This gain on deprecation recapture is required by the IRS whether or not you actually claimed deprecation on your tax return. Please see updated answer.
oswaltmike
New Member

As a resident of CA, will I have to pay any Federal or CA taxes on the sale of a home in MI that we own that valued less than $200,000?

Really appreciate the insight. I assume TurboTax Premier will step me through this. In short, bought home in 2000 for 121,000. Lived there full time except the past 18 months when took on renters (we moved out). Now that rental is over, we are selling. Realtor says likely will sell around $160,000. State equalized value is $88,000 (which in MI is doubled to get the estimated value - $176,000). My hope is that since it only went up in value, if sold at 160,000, by 39,000 - it hasn't kept up with home values, so perhaps little to no gain (aka no tax for Federal or CA)?
DS30
New Member

As a resident of CA, will I have to pay any Federal or CA taxes on the sale of a home in MI that we own that valued less than $200,000?

Yes TurboTax does handle this conversion situation. Just remember that even if you have an overall capital loss on the sale, you will still need to recognize a depreciation recapture on the sale for the months that it was considered a rental property. These rules are set by the IRS.

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