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Capital gain on sale of property

I have own a condo in Detroit for the last 3.5 years and lived there as my primary residence the entire time. In September 2018, I bought a home and have completely moved out of the condo. In the same month, I found a buyer and signed a purchase agreement whereby the buyer has occupancy beginning in October 2018, with a delayed closing until Q1 2019. 

 

I just started to read the fine print of the Principle Residence Exemption language (in Michigan) and I'm concerned about losing the PRE on my condo. I thought this would technically not be considered a rental since the buyer put down a non-refundable deposit but my insurance broker is requiring me to insure it as if it is a rental property. I don't know if this designation matters to me outside of the premiums I pay for insurance (i.e. any implications with the IRS/State when I close this spring?). 

 

Additionally, this resurfaced concerns about capital gain tax on the sale when it goes through in 2019. 

 

I believe these are two separate issues but wondering if anyone can provide any clarity here?

Thanks!

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4 Replies
Carl
Level 15

Capital gain on sale of property

I don't understand your concerns about the rental angle here. It's not a rental now, and never has been for the entire time you owned it, and will not be a rental before you close on the sale. So the "rental" stuff just doesn't figure into this in any way, form or fashion I can see.

 I thought this would technically not be considered a rental

Not to sound sarcastic here, but what is it that makes you even "think" it would be considered a rental? Could it be because the buyer will be occupying the house before the closing date? If so, are they paying you for "ANYTHING" prior to the closing date, such as rent maybe, so you can cover the mortgage payments until the closing? (If yes to the latter, let me know.)

Carl
Level 15

Capital gain on sale of property

Okay, it's been 24 hours and you haven't responded back. So I'm going to make a "LOT" of assumptions here and provide feedback based on those assumptions.

 - They buyer moves into the house in Oct 2018 and will be paying you monthly payments each month until the closing.

 - The monthly payments are clearly identified in the sales contract.

- The month payments are a part of the agreed upon sales price identified in the sales contract.

If all the above is true, then you don't report anything until the closing in 2019. It doesn't matter that some of that sales price will be paid to you in 2018. The deal isn't "closed and final" until the closing date.

 

With the above, if the buyer backs out of the deal, then all monies paid you already that are not refunded are considered rent, and that situation would make the property classified as a rental for the period of time they buyer was in it and paying you to be in it.

Capital gain on sale of property

Sorry for the delay and thanks for the responses. Your assumptions in your recent note are all true which helps put my mind at ease. 

 

As for my question about the insurance, that should have no impact, correct? It's a naming convention for the coverage and will have no implications on the designation of the condo.

 

Thanks again!

 

Carl
Level 15

Capital gain on sale of property

On the insurance, I can only assume that must be due to state laws or something. THere's two basic types of insurance policies that I am aware of for homeowners. One is the standard homeowners policy which I'm sure you're already familiar with. The other type is commonly referred to as a "rental dwelling policy". There's two major important differences between the two types.

1) The rental dwelling policy includes at a minimum, $300K of liability coverage for the property owner.

2) The rental dwelling policy insures *only* the landlord/owner's property, which is namely only the structure being leased out. It does not cover contents (which would include appliances in the property owned by the landlord/owner) and it definitely doesn't include or cover any of the tenant's property.

So if the carport roof caves in and destroys the tenants car parked under it, your insurance pays for the roof, but not for the tenant's car. This is why I highly recommend in my rental contracts that the renter purchase renter's insurance, yet I don't absolutely require it. I have my recommendation in the contract, so in case something happens there is absolutely no doubt that I did inform the tenant of their risk and their potential for loss.

There are other differences between the two policy types. But I just covered the two major ones.

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