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Old 02-07-2012, 10:55 AM
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Rental to personal

My wife and I have bought a property in NY state that we plan to retire to in two or three years. In the meantime we are renting it full-time. Are there any tax implications we should be aware of with this plan? For example, should we take out depreciation on the house and improvements? We are not residents in NY.


Last edited by skllstrm : 02-07-2012 at 04:19 PM.


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Old 02-07-2012, 11:27 PM
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“ Are there any tax implications we should be aware of with this plan?”---->UNLESS you have your primary residence in your home state(NOT in NYS), if you decide to move into a rental property and make(CONVERT) it your primary residence, then many states have Homestead exemption laws that allow you , pty owner,to pay reduced taxes on youir primary residence.ALSO, you get the $250,000($500,000 as MFJ filer) exclusion if you have owned and lived in the home for a total of two years out of the last five. Section 121 of the Internal Revenue Code allows a gain of up to $250,000 ($500,000 if you are married and file jointly) with no tax obligation when you sell a house used as a primary residence for two of the previous five years. You don't even need to occupy the property for two consecutive years during the five year period; just two years out of the five in any form.
“For example, should we take out depreciation on the house and improvements?”----> The IRS refers to ordinary and necessary expenses in reference to rental property; Rental property provides owners with several tax benefits.So, rental depreciation is one of the most beneficial tax deductions because it is a noncash expense. Rental deductions are allowed only based on business use of the property. If a rental property is used personally to a certain extent, all expenses including depreciation must be prorated to reflect only the amounts attributed to business use. You can deduct your depreciation on Sch E of 1040.However, when you dispose of the property( as either rental or residential pty), you should recapture depreciation on the rental proeporty. Depreciation recapture can cause a significant tax impact for people who are selling residential rental properties. Part of the gain will be taxed as a capital gain and may qualify for the maximum 15% rate on long-term gains. The part of the gain that is related to depreciation, however, will be taxed at a maximum 25% rate.However, as long as your primary residence exclusion( as I assume that you convert your rental pty as your primary residence) exceeds your LTCG generated on the sale of the property, then you are NOT subject to r/e depreciation recap rule.



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Old 02-08-2012, 07:58 AM
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To be sure I get it...

Thanks for the reply. Let me repeat what I understood.

We can rent out the house in NYS full time taking the expenses and depreciations. When we convert in two or three years, we can sell our current residence and receive the full $500,000 exclusion. If, after we have live in our new residence for at least two more years having owned it a total of five, we could sell again and receive the full $500,000 exclusion again. I am not clear about the homesteading benefit that you mentioned. Could you clarify?

Thanks again, this is very helpful.



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Old 02-08-2012, 02:11 PM
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“When we convert in two or three years, we can sell our current residence and receive the full $500,000 exclusion. If, after we have live in our new residence for at least two more years having owned it a total of five, we could sell again and receive the full $500,000 exclusion again.”----> Yes as long as the home is your PRIMAY(MAIN HOME)RESIDENCE.Thenyou may qualify to exclude from your income all or part of any gain from the sale of your main home.You can exclude up to $250,000, $500,000 if married, from taxes if youmeet the primary residence exclusion requirements; you owned the residence for any two of the last five years. ;you occupied your residence for any two of the last five years. .also,You haven't used the exclusion within the last two years.
“I am not clear about the homesteading benefit that you mentioned. Could you clarify?”---->I mean, you cannot claim homestead designation for property that you own, but rent out to others/ second home. You can only have one homestead at a time. Homestead thatis owner-occupied receives legal and tax benefits, which extend to all of the family members that live on the property. A property(as your MAIN HOME) owner in the Empire State is allowed to exempt his or her principal residence from judgment or collection due to money debts.



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Old 02-09-2012, 01:30 AM
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Thanks again.

This has been very helpful.



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