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Kamoanui
Returning Member

Selling a Rental Property, Capital Gains, and Buying a new Primary Residence

My husband and I bought a home in 2008 with the intent of living in it for about six years and then selling it.  He is in the military and unfortunately, they decided to transfer us after only two years.  We were not able to sell the home in 2010, because the home's value had gone down so much in those two years. We decided to rent out the property, instead of selling it at a huge loss.  Now it is almost 11 years later and the home has increased in value and our loan has obviously been paid down significantly.  We never wanted to own a rental property and we would like to sell it so we can finally own our primary residence again. (We have been renting homes for the past 11 years at each duty station).  We are up for a transfer this summer and after looking into the new area, we have discovered it is much cheaper to buy a home than to rent one (about $800-$900/month less expensive).  

Is it possible to sell our rental home and use the money from that sale to buy a primary residence without having to pay capital gains taxes?  If not, what are the tax rates for married filing jointly?  I am guessing at this time that the price we could sell our rental home for would be about $125,000 over what we owe on it (without accounting for a realtor fee or taxes).  I'm looking for any advice.  We have a VA loan and while I know we *could* possibly use any unused portion of that benefit, after talking to our bank, they said we would have to come up with a down payment of about $33,000, which we don't have right now.  Thanks for any help you can give!

7 Replies
Carl
Level 15

Selling a Rental Property, Capital Gains, and Buying a new Primary Residence

Lets stick to the basics here and forget about all the extraneous information. Bottom line is, you want to sell the rental and keep your tax liability on the gain as low as possible. What you do with the money doesn't matter, has no bearing on this, and quite frankly, even the IRS doesn't care what you do with the money - so long as you pay your taxes. But lets see if the "5 year extension" for AD/MIL will help you with the capital gains tax exclusion.

Now being military very well may help. Not much, but possibly enough to make it worth it. So I need some details to work with.

On what date did you close on the purchase when you bought the house in 2008?

Were you AD/MIL on that date?

On what date did you move out of the house?

On what date did you convert the property to rental? Pay attention here. I'm not asking on what date you got it rented out. That doesn't matter. On what date did you "covert" the property to rental?

Are you still AD/MIL "right now"? If yes, are you looking to get out of the military before the end of 2019? If so, what date?

 

 

Kamoanui
Returning Member

Selling a Rental Property, Capital Gains, and Buying a new Primary Residence

Thank you for taking time to ask more questions!

Closing date was August 2008, and we refinanced in May 2010 for a better interest rate and lower payment. We moved out the end of July 2010. It was considered a rental on Aug 1, 2010.

We have been active duty military since 1998 and do not plan on separating/retiring for at least the next three years.
Carl
Level 15

Selling a Rental Property, Capital Gains, and Buying a new Primary Residence

You will qualify for a partial exclusion, provided you sell the property BEFORE Aug 1, 2020. For each month *BEFORE* that date, you will qualify for a 1/24th tax exclusion on your gain. But I can't stress the importance of reporting the sale correctly in TurboTax, so the program will ask you if you lived in the house as your primary residence for a period of time in the last **TEN** years counting back from your closing date on when you sell it. If you don't do this right, then the program will only ask about your last FIVE years.

The below instructions are your guidance, and if you follow them to the letter, you will NOT be asked about the last TEN years you owned it. So I provide them only for guidance to "get you started" on the reporting process in the program. I have also modified the below guidance to be more in line with your specific needs.

 

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" (10 years for AD/MIL) capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will ahve a selection on it for "I sold or otherwise disposed of this property in  2017". Select it. After you select the "I sold or otherwise disposed of this property in 2017" you continue working it through "as if" you still own it.

When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. If you had no rental income for the year, you can't leave that section blank. You *MUST* enter a number, even if that number is a zero. If you had no rental expenses, then you don't even need to work that section through and it's not in issue to just leave it blank.

Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

ADDENDUM FOR KAMOANUI:  You'll first be asked if you lived in the home in the last five years. You will tell the truth and answer this question NO for both of you and press on. Then when you get to the "REASON FOR SALE" screen, select *OTHER REASONS* and continue.  Then on the "OTHER REASONS FOR SALE" screen, select "military" and continue.  Then just follow the screens from that point on and for each month it was your primary residence in the last TEN years you owned it prior to the sale, 1/24th of your gain will be excluded from taxation.

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets. You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset. Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically when working through an asset you select the option for "I stopped using this asset in 2017" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

Kamoanui
Returning Member

Selling a Rental Property, Capital Gains, and Buying a new Primary Residence

Thank you for answering my questions so thoroughly! Now we will have to discuss and work on the next steps of this process.
tinl1
Returning Member

Selling a Rental Property, Capital Gains, and Buying a new Primary Residence

is there new guidance for selling rental for 2018?

Gwennie5
Returning Member

Selling a Rental Property, Capital Gains, and Buying a new Primary Residence

I have a similar situation. What did you mean "convert" to rental property not the day you rented it out? How are those different?

 

With my situation, I have a marital home that was a VA loan, purchased in 1996. We divorced and I refinanced, putting the home in just my name. First would that be the new purchase date? Second, just like this other couple, when 2008 hit, my mortgage went upside down.  In 2010/2011, I moved and being upside down, was not able to sell so I rented it out. I didn't make any profit off of it and I never claimed a depreciation on it. I rented the home I was in in another town. I was about to move back to my home in December 2019 but my tenants asked to buy it. We came to an agreement and closed in January 2020. With Covid, finding a new home was a real challenge, but I finally closed on my new primary residence, which yes, I do reside in, in September of 2020. Now I'm doing my taxes and freaking out. Can this be an exchange? I'm worried that I'm giving up my savings in taxes. Help? 

MarilynG1
Employee Tax Expert

Selling a Rental Property, Capital Gains, and Buying a new Primary Residence

@Gwennie5 If you never reported any Rental Income or claimed any Rental Expenses, you could report the sale as the 'Sale of a Second Home'.

 

However, depending on how much you originally paid for the house and how much you sold it for, you could still have Capital Gains to report (and be taxed on).

 

A Loss would not be deductible, however. 

 

Click this link for info on How to Report the Sale of a Second Home

 

Legally, you should enter the house as 'Rental Property' with a Cost Basis of  whatever the FMV was in 2010 when you started renting it. 

 

TurboTax will calculate the Accumulated Depreciation for you. The IRS requires this, even if you never claimed Depreciation.

 

Then, depending on the Sale Price and the current Cost Basis (original cost minus accumulated depreciation), you may still have a Capital Gain to report.  If you have a Loss, it could be deductible though. 

 

You can claim Sales Expenses, and add any major improvements to the Cost Basis when reporting the sale. 

 

Click this link for more info on How Capital Gains are Taxed.

 

This link has info on How to Report Sale of Rental Property

 

 

 

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