Rental Property

[lucyx513]

We bought our first house in 2022 (house A) and lived in it until this summer when we moved into a new house (house B)

We are thinking about listing A as a rental and listing it for sale in Spring 2026 when it’s hopefully a better market

A couple questions on this approach

1. if I rent out A, I assume I list the rental income on Schedule E and then I am able to deduct any mortgage interest and property taxes. Is that correct?
2. If I rent out A, would I lose the Primary Residence Exclusion  when I sell if it’s just for a short period? Less than a year
3. If it doesn’t rent for some reason can I still list on Schedule E with no income but still deduct my mortgage and property tax for the period I have listed for rent? My new house B has a higher interest rate so it would be nice to use the 750K mortgage interest deduction for that house.
4. With no income I assume the expense / deduction will be disallowed and instead be carried over until I sell the house - but if I am still eligible for the Primary Residence Exclusion is there even capital gains to deduct the carried over deduction against? Or soild it reduce other ordinary income?

Thanks in advance 

[pk]

@lucyx513 , assuming that you still need help with this situation/plan:

(a) You have owned ( at least one of you ) and used the prop. A  as your main residence ( both of you ) for at least 730 days,

(b) you have not used the capital gain exclusion in the last two years

then the capital gain exclusion is valid ( 250,000 per filer i.e. 500,000 for MFJ ).  This 730 days  usage is with a look back period of five years from the date of sale conclusion/closing.  Thus if you moved to a new prop--B, made that your  main residence Jan1st of 2026, you have approx.  two years to sell the  prop.A  ( even if rented out  till sale ) and still meet the exclusion criteria.

Note if you rent out then whether you recognize or not allowable depreciation on Prop. A  is going to reduce your basis in the  prop., thereby increasing your gain.  Also that portion of the gain due to accumulated depreciation is treated as ordinary gain ( taxed at your marginal rate), the rest is still eligible for capital gain exclusion.

Thus it is a careful managing of events.

Does this make sense ?  Is there more I can do for you ?

[Opus 17]

1. yes.

2. to use the exclusion, you must have lived in the home for 2 out of the past 5 years (731 days or more, the days do not have to be consecutive).  As a practical matter, that means you have 3 years to sell after moving out.  However, you will pay depreciation recapture on any depreciation you claimed or could have claimed during the rental period, before the exclusion is applied.  

3.  You can list rental expenses begining when you make the property available for rental.  For example, if you list it on November 1 for immediate occupancy, you can start your expenses on November 1.  If you list it on November 1 with a start date of December 1 (to give yourself time to move out), then its not available until December 1.

However, if you never actually get any rental income because no one rents it while it is listed, you may or may not be able to deduct the expenses as a rental loss.  That's a more complicated question than I have knowledge for.  

[Opus 17]

As a financial matter (non-tax), you also need to balance the cost of keeping the house for 9 months against selling it now at possibly a lower price.  Unless you bought the house for cash, you have 9 months of mortgage payments, property taxes, utilities and insurance.  Plus the risk that you won't find a suitable short term rental and the risk of a tenant trashing the place, and the time and effort cost of managing the rental or the money cost of hiring a property manager.  

Assuming you can sell the house today for $X, and you can sell in the spring for $X plus $Y.  $X is the easy money, and the plus $Y is the hard money, you are going to have to work for it, pay for it, and take risks.    Is it worth the cost and risk to wait?

[Mike9241]

@lucyx513 another point is that the depreciation that you'll be required to take as a rental, would be subject to recapture upon sale. likely not much considering the rental would be short-term but still this comes before the home sale exclusion is applied.  if you ask too much for the rent, that could easily jeopardize any schedule E deductions. if you ask below market rent, that presents its own problems as to deductibility on schedule E. no have no assurances the market value will recover. there is always the possibility iy could decline further. Best a question posed to a local realtor.