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Old 07-07-2017, 04:05 PM
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Should I sell now or in Jan2018?

I live in Washington and own a house in California. I want to sell my home and I need to know if there is a reason to wait until Jan. 2018 for tax purposes.

I moved to WA in Jan 2015 so I am still in the window "must live in the home at least two of the last five years" in order to receive the full 500k capital gains benefit.

Home is expected to sell for about 800K. Purchased in 1991 for 242K.

here is what my tax guys reports:

Finally, when you both were in the other day and we were discussing the rental in California and you possibly selling it I wanted to inform you of a IRS regulation that is in place as it pertains to rental and using the 2 out of 5 personal residence exclusion on the federal level. Because it is a business property (rental) and you don't intend to move back into the residence then you cannot receive any rental income from the property in the year of the sale. Therefore you don't want to sell the property in 2017 as you will miss out on the exclusion rather you would want to plan to vacate the residence in late 2017 and sell it in early 2018 assuming that you are still within the 2 of 5 timeframe. I had a client almost get burned by this regulation so I thought I would make you aware for your future planning.

Here is the excerpt from the regs for your reference:

Determine whether the business or rental space still counts as a business space. A space formerly used for business is considered residence space if ALL of the following are true:
You weren’t using the space for business or rental at the time you sold the property,
You didn’t earn any business or rental income from the space in the year you sold your home, and
You used the space as residence space for 2 years out of the 5 years leading up to the sale.
If all of these are true, your business usage DOESN’T affect your gain/loss calculations.


Thanks!


Last edited by bevbrock2017 : 07-07-2017 at 04:43 PM.


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Old 07-07-2017, 10:48 PM
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Join Date: Oct 2010
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I moved to WA in Jan 2015 so I am still in the window "must live in the home at least two of the last five years" in order to receive the full 500k capital gains benefit.=>Correct

Home is expected to sell for about 800K. Purchased in 1991 for 242K.

here is what my tax guys reports:

Finally, when you both were in the other day and we were discussing the rental in California and you possibly selling it I wanted to inform you of a IRS regulation that is in place as it pertains to rental and using the 2 out of 5 personal residence exclusion on the federal level. Because it is a business property (rental) and you don't intend to move back into the residence then you cannot receive any rental income from the property in the year of the sale. Therefore you don't want to sell the property in 2017 as you will miss out on the exclusion rather you would want to plan to vacate the residence in late 2017 and sell it in early 2018 assuming that you are still within the 2 of 5 timeframe. I had a client almost get burned by this regulation so I thought I would make you aware for your future planning.====>Basically as you know, selling your main home usually doesn?t affect your taxes. If you have a loss on the sale, you can't deduct it from income. If you make a profit, you can often exclude it. You see, while you were renting it for some years, you were reporting the rent as income, and you were deducting from the rent an allowance called ?depreciation? so you didn?t pay taxes on that part of the income.So, you claimed a depreciation deduction each year of rental activity and need to recapture on the sale of the rental home as regular income taxed at your reg tax rate usually 25% aslongas your marginal tax rate is 25% or hogher.
You may be eligible for a partial exclusion when failing to meet the 2 year period because of special conditions, such as a change in health, employment (more than 50 miles away) or other unforeseen circumstances. Members of the military are entitled to full exclusions regardless of the length of time they resided in the property if they move to satisfy service commitments

Here is the excerpt from the regs for your reference:

Determine whether the business or rental space still counts as a business space. A space formerly used for business is considered residence space if ALL of the following are true:
You weren?t using the space for business or rental at the time you sold the property,
You didn?t earn any business or rental income from the space in the year you sold your home, and
You used the space as residence space for 2 years out of the 5 years leading up to the sale.
If all of these are true, your business usage DOESN?T affect your gain/loss calculations.=========>I guess it depends;as said, for taxation purposes, the IRS considers rental property and a personal residence in separate classes. This distinction determines whether you have a taxable capital gain at the end of the transaction. If Primary Residence Includes Rental Property, To compute what you might owe in federal income taxes, you?ll have to make the assumption that your primary home was partly your primary residence and partly an investment property.
You?ll have to allocate a percentage of the property as a whole to your primary residence and then determine whether you owe taxes on the sale of your home.


Unfortunately, the capital gains exclusion does not apply to rental properties. It applies only to your primary home. But, you can turn a rental house you own into your primary home, and, by doing so, make the sale eligible for the tax exclusion. If it suits you, you can move into your rental house, live in it for two or more years, and then sell it and pay no tax on your gain if it?s under the exclusion limits. As said previously, when you own a rental property, even if it?s part of your primary residence, you get benefits (in the form of depreciation and income offsets) over the years on your federal income taxes. When you sell that property, the federal government requests that you repay those benefits as part of a recapture tax. Also, when you sell an investment property and you sell it and make money on the sale, the federal government taxes that gain as capital gains (if you have owned the property for at least 12 months) I mean as sec 1231 gain.



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