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Old 11-02-2017, 09:21 PM
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Second House- Capital Gains

My husband and I are considering purchasing a house while keeping our current condo to rent it out. Our concern with doing this is having to pay capital gains taxes when we sell our condo since we would then own two residences.

We?ve done a little bit of research, but want to make sure we?re understanding it correctly. Is it correct that since we?ve lived in the condo for over two years, if we sell it within the next five years, we?d be exempt from capital gains taxes but if we go beyond the 5 years, we?d have to pay them on the profit when we sell?



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Old 11-04-2017, 11:43 AM
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We?ve done a little bit of research, but want to make sure we?re understanding it correctly. Is it correct that since we?ve lived in the condo for over two years, if we sell it within the next five years, we?d be exempt from capital gains taxes but if we go beyond the 5 years,=====>
It depends; as you can see , if you know in advance that you eventually want to sell your rental property, you can move into the home first and minimize any capital gains tax. The IRS offers a tax exclusion of $250k for single taxpayers and $500k for married taxpayers for capital gains resulting from the sale of your primary residence that is a home that you personally live in the majority of the year. If you have a house in Palm Beach and one in Lake Tahoe and you spend 8 months of the year at the Tahoe home than that is your primary residence. But, keep in mind the 2 out of 5 part of the rule. since you rented out the property when you bought it, but if you then live there for 2 years before you sell it, you can claim a portion of this exclusion if you owned the property for at least 5years. Your exclusion is reduced by the amount of time the home served as an investment property. For example, if you owned the property for 8years, rented it out for 6years, and lived in it for the last 2 years, it served as an investment property 75 percent of the time. Therefore, you can exclude 25 percent of your gain from taxation
so, You have to allocate the capital gain between the rental use andpersonal use. Only the capital gain due to personal use is tax-free Or If you sell the property for a profit and it was your primary residence for at least 2 of the last 5 years, you may qualify for the capital gains tax exclusion. bUt remember, you need to recapture the unrecaptured so called sec 1250 depreciation when you dispose of the rental condo converted into primary residence. Depreciation recapture can cause a significant tax impact when you sell a residential rental property.Part of the gain is taxed as a capital gain and may qualify for the maximum 15 % rate on long-term gains, but the part that is related to depreciation is taxed at a maximum 25% rate. A Rental property can also be sold as part of a like-kind exchange to defer both capital gains and depreciation recapture taxes.
Note; you are required to have owned and lived in the real property as your primary residence for at least a combined total of 24 months out of the last 60 months (2 out of the last 5 years) in order to qualify for the capital gain exclusion. The 24 months does not have to be consecutive; however, you can no longer take the full tax free exclusion under Section 121 as the property was held and used for non-qualified use, as rental home I mean, prior to it being held and used as a primary residence (qualified use). So, the capital gain resulting from the sale of the property will be allocated between qualified and non-qualified use periods based upon the amount of time the property was held and used for qualified versus non-qualified use. The amount of your LTCG exemption would be decreased as you need to recapture sec 1250 depreciation taken on the rental pty in the previously years and you must recapture the depreciation as ordinary gain on the sale of the home. If your marginal; tax rate is 25% or higher than then the accumulated depreciation?d be taxed at 25% Simply say your excludible LTCG(after subtractionof nonqualified portion) is $200K and the amount of the accumulated depre on the rental pty was $20K then you need to pay tax of $5K;$20K*25%(as I assume your tax rate is 25% or higher), and then you can exclude only $180K;$200K-$20K. However, non-qualified use after the property was held and used as a primary residence will not count against you as long as you still qualiy for the 121 exclusion. Any and all non-qualified use of the property prior to January 1, 2009 will not be taken into account and is ignored for 121 exclusion treatment; only the non-qualified use of the property after December 31, 2008 will affect homeowners.
For example, assume that you buy your property on January 1, 2009 for $400K and leases it out for two years. you claims$20K of depreciation deductions for those two years. On January 1, 2011, you convert the property and begin to use the property as your primary residence. You move out of your property on January 1, 2013, and subsequently sell it for $700K on January 1, 2014.The period from 2009 through 2010 is non-qualified use of the property because it was held as investment (rental) property. The year 2013, after you moved out, is treated as qualified use of the property .Out of the $300K; I mean $700K-$400K capital gain, 40 percent or 2/5ths (two years out of five years owned), or $120K , is not eligible for the tax free exclusion. The balance of the capital gain, or $180K, may be excluded tax free under Section 121. The $20,000 gain attributable to the depreciation deductions is recaptured taxed at 25%(if your tax rate is 25% or higher), as required under current law.to sum it up, as your tax rate is 25% then 15% of gain tax?d be applied to $120K while zero tax on $160K and 25% of tax would be applied to $20K sec 1250 recapture.




we?d have to pay them on the profit when we sell?===>>As mentioned above; youmust recapture sec 1250 deprecaiiton taxed as regular income when you dispose of the pty aslongas there is a capital gain on the sale



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